Buyers plan more Neiman stores

[HenryTo]

10.1 times EBITDA for a company that grew its earnings 87% last year is probably overpaying here. The amount of acquistions and buyouts in the last six to twelve months have been nothing short of phenomenal. Trimtabs says this is bullish because it adds liquidity to the market but are companies getting too crazy here? They are not exactly purchasing assets at firesale prices. Kind of reminds me of the Columbia Pictures acquistion by Sony in 1989 - right before the Nikkei peaked.
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TheDeal.com
Buyers plan more Neiman stores
Tuesday May 3, 6:00 am ET
By Brenon Daly

By slowly expanding over the past century, Neiman Marcus Group Inc. has maintained an image as a rarefied retailer, drawing in select shoppers who spent more there than in any other luxury goods store.

Its elitist atmosphere and hefty price tags earned it the nickname Needless Markup by those who couldn't afford the $1,800 purses and $800 belts carried at the exclusive stores. Even as sales of these and other luxuries took off, Neiman Marcus has only opened the doors on 14 new locations over the past 15 years.

Nonetheless, the approach has paid off for the Dallas-based retailer, with Texas Pacific Group and Warburg Pincus saying Monday they will pay $100 per share for the Dallas-based retailer. Pending shareholder and regulatory approval, the $5.1 billion buyout is set to close in November.

Neiman Marcus shares eased 5.5% Monday, May 2, to $92.95, though they have doubled over the past year.

Some observers are already questioning how the new owners, who plan to open an unspecified number of new stores, will preserve the "scarcity" that attracts well-heeled customers. Neiman Marcus now has just 35 namesake stores along with two Bergdorf Goodman locations, though it has plans to open two stores later this year, the first since 2003.

The group "is talking about growing the business rapidly, which conflicts with the idea of luxury," said Howard Davidowitz, chairman of Davidowitz & Associates, a New York investment banking boutique focusing on the retail industry. "You have to be very careful not to spoil it if you ratchet up the growth."

By serving as a main stop for shoppers with platinum credit cards, Neiman Marcus has been able to outpace other retailers. Sales per square foot run about $550, nearly $200 more than those of rivals Saks Inc. and Nordstrom Inc., according to the company.

Neiman Marcus may look to open stores outside the U.S., where it has yet to expand. "I think one of their stores in London or one of their stores in Tokyo would do fabulous," said George Whalin, president and CEO of Retail Management Consultants.

Neiman Marcus representatives did not return calls.

TPG and Warburg are paying an estimated 10.1 times Neiman Marcus' Ebitda over the past year, compared with the 9 times Ebitda that Barneys New York Inc. commanded in a similarly contested auction that clothing company Jones Apparel Group Inc. won last November.

More recently, Federated Department Stores Inc. paid an estimated 8.8 times Ebitda for fellow midtier chain May Department Stores Co.

"I don't know how they're going to realize any value here," Davidowitz said of TPG and Warburg. The firms, equal partners in the deal, beat out a joint bid from Bain Capital LLC and Kohlberg Kravis Roberts & Co. and a second offer from Blackstone Group LP and Thomas H. Lee Partners LP.

"We paid a full but fair price for a great-performing company," said Kewsong Lee, a managing director at Warburg Pincus who leads the firm's leveraged-buyout group. "Neiman Marcus completely fits our investing profile, its historical performance is the best in the industry, and it has the best prospects moving forward."

The purchase is the second multibillion-dollar buyout in the retail industry by an investment group in the past two months. In March, KKR and Bain Capital, along with publicly held Vornado Realty Trust, acquired Toys "R" Us Inc. in a deal that could be worth $7 billion.

But Toys "R" Us is more of a turnaround investment, while Neiman Marcus already operates much more profitably than any other high-end rival. It rarely relies on markdowns to clear shelves.

In the previous fiscal year, its stores generated $311 million of operating income on sales of about $2.9 billion. For comparison, Saks' high-end business — consisting of its 58 marquee Saks Fifth Avenue stores and 52 discount Saks Off 5th locations — generated about the same amount of sales as Neiman Marcus but just $125 million in operating income.

On Friday, Saks sold two of its down-market chains to rival Belk Inc. and indicated others were still on the block as the Birmingham, Ala.-based retailer sharpens its focus on its faster-growing and more profitable luxury retailing business.

The luxury market, however, is showing signs of cooling.

Sales at Neiman Marcus stores open more than a year increased 13% in its most recently completed fiscal year, ended in July. So far this fiscal year, monthly comparable store sales have averaged 9.1% gains.

"In fashion and in retail, nothing is forever. Luxury is slowing," Davidowitz said.

In addition to the Neiman Marcus and Bergdorf Goodman stores, the purchase also includes the company's direct marketing operations, which includes catalog and online sales. That division rang up sales of $570 million and operating income of $61 million in the previous fiscal year.

One piece of Neiman Marcus that's not part of the transaction is the company's credit card portfolio. It expects to sell that in the coming weeks, continuing a series of divestitures of credit card operations by retailers. Financial institutions have been the acquirers in previous deals.

According to sources, the buyout group has received financing commitments from Credit Suisse First Boston, Deutsche Bank AG and Goldman, Sachs & Co. The package will be worth $3.5 billion, although it's unclear how much of the package will consist of senior debt and how much of subordinated bonds.

The sources said sponsors are negotiating aggressive covenants on the financing, and there is a sense that the deal may allow the issuer to defer interest payments on some part of the debt through pay-in-kind notes. Neiman Marcus' assets will likely also back some of the debt, although the sources add that it is too early to say how much.

Acquiring partners TPG and Warburg Pincus relied on Credit Suisse First Boston for financial advice. Cleary Gottlieb Steen & Hamilton LLP was counsel for both buyers. In addition, Willkie Farr & Gallagher LLP was counsel to Warburg Pincus. Neiman Marcus tapped Goldman Sachs and J.P. Morgan Securities Inc. for financial advice and Simpson Thacher & Bartlett LLP for legal advice.

— Kelly Holman and Vipal Monga in New York contributed to this report