neiman marcus company analysis

8/10/2019 Neiman Marcus Company Analysis

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Neiman Marcus: Company Analysis

Professor: Lowell DSouza

Ray ChengTable of Contents

Business Overview

Specialty Retail Stores

Direct Marketing

Distribution


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Competitive Landscape

Growth Strategy

Risks

Recent Developments

Financials

Financial Statements and Statistics

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Neiman Marcus: Business Overview

Neiman Marcus is a privately held luxury retailer that offers men and women's apparel, designer

jewelry, cosmetics and fragrances, home furnishings and decor, and other luxury items through

its retail and direct marketing channels.

Neiman Marcus' operations are divided into two segments, Specialty Retail Stores and Direct

Marketing.

Specialty Retail Stores

Neiman Marcus Stores

Neiman Marcus stores offer luxury merchandise, including women's couture and designer

apparel, contemporary sportswear, handbags, fashion accessories, shoes, cosmetics, men's

clothing and furnishings, precious and designer jewelry, decorative home accessories, fine

china, crystal and silver, children's apparel, and gift items.

Bergdorf Goodman Stores

Bergdorf Goodman is an upscale retailer that offers couture merchandise such as high-end

apparel, fashion accessories, shoes, traditional and contemporary decorative home

accessories, precious and designer jewelry, cosmetics, and gift items.

Last Call Stores

Through the Last Call outlets, the company sells end-of-season and other clearance items such

as apparel, shoes, jewelry, handbags, luggage, and furniture at discount prices.

CUSP Stores

Neiman Marcus operates 6 stores under the CUSP brand. CUSP stores have a smaller format

(6,000-11,000 sq. ft.) and target a younger customer base. Beginning in 2012, Neiman Marcus

began to rebrand the contemporary departments within Neiman Marcus stores as CUSP.

Horchow Finale StoresHorchow is a furniture and home decor brand owned by Neiman Marcus. Horchow items are

sold at Horchow stores and in some Neiman Marcus locations.


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Neiman Marcus Direct Marketing

The Direct Marketing segment of Neiman Marcus operates e-commerce sites under the Neiman

Marcus, Bergdorf Goodman, Horchow, Last Call and CUSP brands. In addition, Neiman Marcus

offers direct-to-consumer sales through its catalogs for the Neiman Marcus and Horchow brands.

The Direct Marketing operation significantly improves the ability of the company to extend its

reach, as approximately 40% of online and catalog customers were located outside the trade

areas of Neiman Marcus' existing retail locations.

Notable vendors include: Chanel, Gucci, Prada, Giorgio Armani, St. John, Akris, Escada,

Christian Louboutin, Manolo Blahnik, Tory Burch, Balenciaga, La Mer, Sisley, Bobbi Brown, La

Prairie, Estee Lauder, Laura Mercier, Brioni, Tom Ford, Loro Piana, Ferragamo, Stefano Ricci,

David Yurman, John Hardy, and Cartier.

In addition to the company's traditional offerings of luxury apparel and merchandise, the

company also offers "fantasy gifts" through its catalogs, which have included a custom-made

library from Assoluine, Johnny Walker Scotch tasting parties and bespoke Ferrari cars.

Distribution

The majority of the Neiman Marcus merchandise is received from vendors as finished goods.

Merchandise is manufactured in Europe and the United States and, to a lesser extent, China,

Mexico, and South America.

The majority of the company's merchandise is initially received at one of several centralized

distribution facilities. To support the Specialty Retail Stores segment, Neiman Marcus utilizes a

primary distribution facility in Longview, Texas, a regional distribution facility in Dayton, New

Jersey and four regional service centers. Neiman Marcus also operates two distribution facilities

in the Dallas-Fort Worth area to support the Direct Marketing operation.

Competitive Landscape

The specialty retail industry is highly competitive and fragmented. Neiman Marcus competes

with other specialty retailers including Saks Fifth Avenue, Barney's New York, as well as high-end

department stores including Nordstrom and Bloomingdales. Additionally, the company

competes with national apparel chains, vendor-owned proprietary boutiques and direct

marketing firms.


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Neiman Marcus competes primarily on product quality and fashion and in an increasingly

fragmented luxury apparel market, product pricing and shipping costs.

Growth Strategy

Domestic Expansion

The opportunity for domestic expansion is limited because Neiman Marcus already operates

stores in the most affluent communities in the U.S. that are able to support the luxury retailer.

However, the company opened three Last Call stores in strip centers and power centers in 2012.

In addition, the company plans to open a 100,000 square foot store in Garden City, NY. The Long

Island location will be the company's first and it is expected to open in 2015.

International Expansion

In March 2012, Neiman Marcus purchased a non-controlling stake in Glamour Sales Holdings, anAsia-based e-commerce company which operates flash sales websites in Asia including the

leading flash sales e-commerce site in Japan. Through this strategic stake, Neiman Marcus

intends to launch a full-price luxury e-commerce website in China. While the flash sales site and

luxury e-commerce site will remain separate, Neiman Marcus hopes to capitalize on Glamour

Holdings' existing base of more than 1 million active customers.

Both China and Japan represent an attractive market for Neiman Marcus given their large

population, growing middle class, luxury appetite and affinity for foreign brands. By developing

its brand internationally, Neiman Marcus also hopes to make Chinese and Japanese consumers

more aware of Neiman Marcus when they travel overseas.

At the end of 2012, Neiman Marcus announced that it would grow its online reach

internationally to 100 countries through a partnership with FiftyOne Global Ecommerce, a

technology company that helps retailers transact online with customers outside the United

States.

New Product Offerings

In late 2011, Neiman Marcus launched NM on the Go, in-store boutiques that offer active wear

including active tops, bottoms and jackets, fleece wear, swimsuits, and sports bras. In addition to

apparel under the Neiman Marcus label, the company offers fashionable workout clothing from

Payne, Aryn Glasser, Splits 59 and Zobha, among other vendors.


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Neiman Marcus has also expanded its product range in its contemporary department, which

the company has rebranded as CUSP, the sub-brand used for its smaller-format stores.

Innovative Marketing

In 2012, Neiman Marcus launched its NM Service location-aware application that alerts sales

associates when customers enter the store, giving the associates instant access to their

customers' shopping history. As consumers are increasingly willing to share personal information

including purchase history, biometric fit and style choices, sales associates are better able to

tailor the product range they present to shoppers.

New Payment Methods

Following turbulent years of recession and a disappointing recovery, Neiman Marcus CEO Karen

Katz announced in October 2011 that Neiman Marcus would be accepting Master Card and

Visa. Formerly accepting only cash, American Express, and the Neiman Marcus credit card, the

luxury retailer stated that many customers had persistently requested for a wider credit card

acceptance. In July 2012, the company also began accepting Discover cards.

The acceptance of new credit cards has paralleled similar efforts the company has recently

taken to appeal to a less affluent customer base, especially to younger shoppers.

Target + Neiman Marcus Partnership

For the 2012 Christmas season, Neiman Marcus partnered with Target, a discount retailer, to

launch the Target + Neiman Marcus Holiday Collection. Neiman Marcus and Target worked with

24 designers from the Council of Fashion Designers of America to offer a collection of men's,

women's, and children's apparel and accessories at all Neiman Marcus and Target stores. The

collection also included sporting goods, home decor, pet accessories, and electronics

accessories. Participating designers included Carolina Herrera, Derek Lam, Diane von

Furstenberg, Jason Wu, Marc Jacobs, Oscar de la Renta, and Tory Burch.

Risks

Economic Downturn

As a retailer of luxury and discretionary goods, Neiman Marcus' growth is highly dependent on

the level of consumer spending, especially among its affluent customer base. The economic

downturn beginning in 2008 significantly impacted Neiman Marcus, experiencing a decline in

revenues of more than 20% over 2009. While revenues and profits recovered a little since then,


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Neiman Marcus still remains vulnerable to a continuation or worsening of global economic

conditions.

Debt Obligations

As a result of the 2005 leveraged buyout, Neiman Marcus' capital structure is highly leveraged.

By the end of the company's fiscal 2012, Neiman Marcus maintained debt obligations in excess

of $2.8 billion. While Neiman Marcus has begun to recover from a significant decline in revenues

arising from the 2008 economic downturn, the company must maintain this sales growth to

continuously service its debt and avoid restrictive covenants and borrowing conditions.

Recent Developments

Dividend Payment

On March 30, 2012, Neiman Marcus issued a $442.6 million dividend to a small group ofshareholders including TPG Capital, Warburg Pincus, and fewer than 50 current and former

executives. Neiman Marcus financed the dividend with $150 million in borrowings from its asset-

based revolving credit facility, while the rest was paid with cash on hand. The payment of a

dividend signals that the company's equity partners are eager to profit from their investment.

Potential IPO

Neiman Marcus' multi-faceted and aggressive growth strategy and recent financial growth

have led to rumors that the company is exploring a potential IPO. Neiman Marcus' private equity

owners, Warburg Pincus and TPG Capital, are looking for an exit strategy after acquiring Neiman

for $5.1 billion in 2005. Neiman was estimated to be worth around $4 billion at the end of 2012.

An acquisition is unlikely since competing retailers passed over the opportunity in 2005. Private

equity firms have not expressed interest either. Starting in August 2012, Neiman's owners have

been looking at an IPO to cash out.

Following poor performance during the economic downturn, Neiman's financial performance

has improved. Revenue grew in 2012 in large part due to improving economic conditions as well

as growth in e-commerce revenue streams. Neiman Marcus has also moved towards younger

and less wealthy markets to expand revenue. Additionally, Neiman has succeeded in paying

down some of its debt from its 2005 leveraged buyout.

Michigan Ave. Renovation Efforts

On October 12, 2012, Neiman Marcus announced that its flagship Michigan Avenue location

would be undergoing a two-year multimillion-dollar renovation that will dramatically change the


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29-year-old store's layout and bring in new designers. This renovation was originally scheduled for

2008, but stalled due to worsening economic conditions. The renovation will be ongoing until

June 2014, with various sections of each of the four floors undergoing construction while the

store remains open. The main function of the renovation is for the company to add twelve new

designer shops to the third floor, to consolidate the men's product section, and to make more

efficient use of its existing retail space.

2012 Holiday Partnership with Target Stores

For the 2012 holiday season, Neiman Marcus partnered with mass-market department store

chain Target to offer a special apparel and accessories collection from two dozen leading

fashion designers, offered exclusively at both chains. The two companies invested in a large

marketing campaign with an aura of exclusivity, and limited each shopper to just five items

each. However, the sales results proved disappointing.

Immediately following the Christmas holiday, Target began cutting prices by 50 percent on

many of the products from designers like Marc Jacobs, Proenza Schouler, and Diane von

Furstenberg, and the cap on items per shopper was quietly lifted. The partnership is unlikely to be

repeated.

FTC Settlement Over Faux Fur

In early 2013, Neiman Marcus agreed to settle with the FTC over claims that the company was

falsely advertising certain products as including faux fur when in fact real animal fur was

included. The agreement did not require any fees, but any subsequent violations could carry

fees from $10,000 to $20,000.

Chinese Scale Back

In late May of 2013, Neiman Marcus scaled back its physical presence in China by closing their

warehouse, after quietly launching there late in 2012. This was a change of strategy, particularly

after their March 2012 investment in Chinese website, Glamour Sales. The Neiman Marcus

Chinese website itself however, was kept online, although all orders were shipped out of the U.S.


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Financials

2014 2013 2012 2011 2010

Liquidity Analysis:

Current Ratio 1.65 1.66 1.58 1.97 2.05

Quick Ratio 0.4 0.34 0.28 0.7 0.86

Interest Coverage Ratio 0.15 2.64 2.3 1.18 0.98

Working Capital (thousand) $553,091 $509,271 $418,506 $640,541 $697,579

Financing Analysis:

Debt to Equity Ratio 3.2 3.23 4.52 2.7 3.11

Debt Ratio 0.52 0.51 0.53 0.5 0.52

Activity Analysis:

Inventory Turnover Ratio 4.52 4.56 4.62 4.77 4.67

Productivity (Revenue/Employees) $293,293 $296,067 $275,024 $257,431 $256,442

Performance Analysis:Cash Return on Assets 3.37% 6.59% 4.99% 5.08% 4.84%

Gross Profit Margin 32.87% 35.56% 35.69% 35.30% 34.53%

Profit Margin -3.04% 3.52% 3.22% 0.79% -0.05%

Return on Assets -1.68% 3.09% 2.69% 0.59% -0.03%

Return on Equity -10.27% 19.70% 22.76% 3.18% -0.20%

Liquidity Analysis

Based on the current ratios, Neiman Marcus has the ability to pay off its short-term liabilities with

its short-term assets. We can assume that Neiman Marcus has an efficient operating cycle. The

current ratio was above industry average from 2010 to 2011 and declined until 2012. The current

ratio drops substantially in 2012. This could be due to some obstacles that the company had to

overcome during that year. We see a similar trend with the quick ratio. The quick ratio is above

industry average until 2012 with a substantial drop in 2012. The interest coverage ratio increased

consistently until the most recent year. This could be due to increased debt financing for

domestic expansion. By looking at working capital, we can see that Neiman Marcus has


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improved its operational efficiency over the past few years. In 2010, Neiman Marcus may not

have been investing its excess cash. In 2012 the company ran into some obstacles and from

2012 to 2014, the operational efficiency has increased.

Financing Analysis

From the debt to equity ratio, we can see that Neiman Marcus has been very aggressive in

financing its growth with debt. Because of this, earnings over the last five years have been

relatively volatile; however, in 3 out of the five years, Neiman Marcus has seen increasing profits.

In these years, more earnings are spread among the same amount of shareholders. From the

debt ratio, we see that Neiman Marcus has less debt than assets.

Activity AnalysisNeiman Marcus has a healthy inventory turnover ratio; however, it is below the industry average

and it has been decreasing slightly since 2011. The companys productivity is more than double

the industry average and has been increasing since 2010.

Performance Analysis

From the gross profit margin, we see that Neiman Marcus marks up its products around 50%. We

also see that the company has an adequate ability to pay its operating and other expenses and

build for the future. The gross profit margin has also been relatively stable which shows thatNeiman Marcus has not implemented any drastic changes to pricing policies or anything that

affects cost of goods sold. From the profit margin, we see that Neiman Marcus controlled its

costs of goods sold effectively from 2011 to 2013. We also see that Neiman Marcus incurred

significantly more debt financing in the years 2010 and 2014. In regards to the return on assets,

Neiman Marcus could be doing a better job. Management should implement strategies to earn

more money on less investment. In regards to return on equity, the returns are volatile with years

2012 and 2013 having significant returns and negative returns in 2010 and 2014. This volatility can

be a result of the high debt to equity ratios.


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Deferred Non-Current Liability

Charges (See Note: 1) 1,540,076,000 639,381,000 626,605,000

Deferred Long Term LiabilityCharges (See Note: 2) 4,460,000 104,366,000 107,787,000 99,991,000 96,093,000

Other Non-Current Liabilities 347,392,000 251,673,000 344,809,000 242,686,000 299,954,000

Total Liabilities 7,329,132,000 4,469,203,000 4,586,312,000 4,370,472,000 4,606,909,000

Stockholders Equity 1,432,594,000 831,038,000 615,543,000 994,297,000 925,373,000

Minority Interest

Neiman Marcus Cash FlowStatement 2014 2013 2012 2011 2010

Cash Flow From OperatingActivities 295,696,000 349,359,000

259,810,000(See Note: 3) 272,384,000 268,038,000

Increase in Working Capital(Decrease) 50,318,000 -54,202,000

Depreciation and Amortization 327,502,000 197,355,000 188,699,000 209,642,000 233,795,000

Deferred Income Taxes -124,200,000 -19,439,000 -10,094,000 3,967,000 -39,643,000

Cash Flow From Investing

Activities -3,527,551,000 -156,505,000 -182,259,000 -94,181,000 -58,693,000

Payments for Property and

Equipment 173,966,000 146,505,000 152,838,000 94,181,000 58,693,000

Purchase of Investments

Purchases and Payments forInvestments

Disposal of Investments

Cash Flow From Financing

Activities 3,291,655,000 -105,431,000 -349,889,000 -277,619,000 -111,763,000

Increase in Debt (Decrease) -243,672,000

Income Taxes Paid 111,085,000 78,854,000 22,458,000 15,930,000

Cash Interest Expense 153,131,000 164,700,000 195,543,000 200,676,000

Total Cash Flow (Net Change inCash) 59,800,000 87,423,000 -272,338,000 -99,416,000 97,582,000

Cash & Cash Equivalents End of

Year 312,600,000 136,676,000 49,253,000 321,591,000 421,007,000

Cash & Cash Equivalents

Beginning of Year 252,800,000 49,253,000 321,591,000 421,007,000 323,425,000

Neiman Marcus EmployeeFigures 2014 2013 2012 2011 2010

Total Employees 16,500 15,700 15,800 15,547 14,400

Neiman Marcus, Last Call &Cusp Store Employees 12,500 11,800 11,600

Bergdorf Goodman Store

Employees 1,100 1,100 1,000

Direct Marketing Employees 1,700 1,500 1,300

Neiman Marcus Group

Employees 500 500 500

Productivity(Revenue/Employee) 293,293 296,067 275,024 257,431 256,442

Neiman Marcus LocationStatistics 2013 2012 2011 2010 2009

Total Locations 99 81 79 77 77

Neiman Marcus RevenuesBreakdown 2014 2013 2012 2011 2010

Online Revenues 1,148,503,000 1,031,311,000 878,740,000 757,100,000 573,924,000

Neiman Marcus Revenues bySegment (as % of Total

Revenues) 2014 2013 2012 2011 2010

Specialty Retail Stores 76.30% 77.80% 79.78% 81.08% 81.53%

Direct Marketing 23.70% 22.20% 20.22% 18.92% 18.47%

Neiman Marcus Revenues byMerchandise Category (as % of 2014 2013 2012 2011 2010


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Total Revenues)

Women's Apparel 30% 31% 34% 35% 36%

Women's Shoes, Handbags, andAccessories 28% 27% 25% 24% 22%

Men's Apparel and Shoes 12% 12% 12% 12% 11%

Cosmetics & Fragrances 11% 11% 11% 10% 11%

Designer & Precious Jewelry 11% 12% 11% 11% 11%

Home Furnishings & Decor 6% 5% 6% 6% 7%

Other 2% 2% 1% 2% 2%

2014 2013 2012 2011 2010

U.S. Retail Revenues 4,648,000,000

Retail Revenues 4,648,000,000

Notes

(*) The Neiman Marcus Group, Inc. fiscal year end: 07/31

(Note 1) Deferred income taxes

(Note 2) Deferred real estate credits(Note 3) Through Q3 April 28, 2012


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"Neiman Marcus Group LTD LLC Reports Fourth Quarter and Fiscal Year 2014 Results." Neiman

Marcus Group LTD LLC Reports Fourth Quarter and Fiscal Year 2014 Results. Business Wire,

17 Sept. 2014. Web. 22 Nov. 2014.

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"The Neiman Marcus Group." The Neiman Marcus Group. N.p., n.d. Web. 21 Nov. 2014.

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"Retail Apparel Industry Analysis." CSIMarket. N.p., n.d. Web. 22 Nov. 2014.

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