neiman marcus ipo valuation

D I S C U S S I O N M A T E R I A L S

Neiman Marcus: What should

the IPO price at?

Andrew Boone, CFA

N E I M A N M A R C U S

1

What does Neiman Marcus do?

O V

E R

V I E

W

Neiman Marcus owns 43 full-line namesake stores (high end), 2 Bergdorf Goodman

stores (ultra high end), 35 Neiman Marcus Last Call stores (discount), & 6 CUSP

stores (contemporary – middle tier)

Neiman Marcus stores are a collection of high end luxury boutiques rather than a

traditional department store. This helps differentiate the customer experience

and allows for a higher price point

Neiman operates ecommerce sites for Neiman Marcus, Bergdorf Goodman, Last

Call, CUSP, & Horchow and ships to 100+ countries

Neiman Marcus overview

Source: Company filings


2

IPO

O V

E R

V I E

W

On June 24th, Neiman filed an S-1 with the SEC

On Aug. 6th, Reuter's reported that Credit Suisse, Bank of America, and JPMorgan

have been appointed to lead the possible IPO

The company is currently owned by TPG Capital, Warburg Pincus, and Leonard

Green & Partners, who are now looking to exit

TPG and Warbug Pincus took the company private in 2005

Neiman Marcus IPO

Source: Company filings, Reuter's


3

O V

E R

V I E

W

Neiman Marcus SWOT

Weaknesses

Neiman's brand portfolio provides

exclusivity which creates a network effect

Neiman has a long standing relationship

with the wealthy. For example, Neiman

only began accepting Visa and MasterCard

in 2011, opening the store to mid-tier

shoppers (those without AmEx)

The wealthy are recession resistant

shoppers with high discretionary spending

Strengths

Threats Opportunities

Neiman has JV'd with a company to create a

Mandarin Neiman Marcus website. Luxury

goods are frequently counterfeited in

China, Neiman's entry in the market may

lead to additional Asian brick & mortar

stores and ecommerce sales

Develop and cultivate CUSP for middle tier

shoppers using Neiman's relationship with

higher end designers

Luxury/high end designers retailing their

clothing directly to consumers through

websites

Increased counterfeit items are entering

the market, this degrades the value of high

end luxury brands

Lack of middle market exposure creates a

business model dependent on the wealthy's

(predominantly women's) discretionary

spending

Extremely low private label sales (~2% of

rev) pressures margins


4

Benefits of targeting the wealthy

The rich continue to get richer: 1990-2010 US

household income at select percentiles

C U

S T

O M

E R

S

2011 disposable income by household income

bracket

Neiman targets a growing and favorable customer base

Source: Company filings, Experian, US Census

The North American luxury goods industry is expected to grow at an annual rate of

6.6% from 2012-2017

The global luxury goods industry is expected to grow at an annual rate of 7.2%

from 2012-2017

According to the Pew Research Center, the average net worth of households in the

upper 7% rose 28% from 2009 to 2011, while the remaining 93% experienced a fall

of 4%

0

50,000

100,000

150,000

200,000

1990 1995 2000 2005 2010

10th percentile 20th percentile 50th (median)

80th percentile 90th percentile 95th percentile

$5,590 $7,870 $12,800 $14,400

$19,400

$30,200

$54,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000


5

Neiman is an exclusive retailer

B R

A N

D P O

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F O

L I O

Sales per square foot

Neiman's sustainable moat is its relationship with luxury

brand producers

Source: Company filings, Bloomberg

The exclusivity of Neiman is driven by its brand portfolio

Neiman's sustainable moat is its portfolio of high end brands. Neiman's portfolio

creates a network effect for high end brands. This causes new brands to strive to

be sold at Neiman's because of the perceived value that a Neiman's buyer places on

that brand by putting it amongst the other brands

The higher price points are best exhibited by Neiman's higher sales per square foot

$438

$485

$545

$200

$250

$300

$350

$400

$450

$500

$550

$600

Saks Nordstroms Neiman


6

Neiman has a relationship with high end customers because of the exclusivity of the brands they sell

B R

A N

D P O

R T

F O

L I O

~40% of Neiman's brands cannot be found at Saks,

Nordstrom, nor Bloomingdales

*available at Saks; + available at Nordstrom; ^available at Bloomingdales

Source: Company filings, Company websites

1. Adam Lippes

2. Akris*

3. Akris punto*+

4. Alexander McQueen*+^

5. Alexander Wang+

6. Altuzarra

7. Aquilano.Rimondi

8. Armani Collezioni*+^

9. Belstaff

10. Bottega Veneta*+^

11. Brunello Cucinelli*

12. Burberry+^

13. Carolina Herrera*+^

14. Chado Ralph Rucci

15. Chloe*

16. Christopher Kane*+

17. Derek Lam*

18. Dolce & Gabbana*

19. Donna Karan*+^

20. Dsquared2+

21. Elie Saab+^

22. Emilio Pucci*+^

23. Erdem*+

24. Escada^

25. eskandar

26. Etro*+

27. Fendi*+^

28. Gareth Pugh

29. Giambattista Valli*

30. Giorgio Armani+^

31. Gucci*+^

32. Herve Leger*+

33. J. Mendel

34. Jason Wu*+

35. Jean Paul Gaultier*+^

36. Jil Sander*+

37. Jonathan Saunders

38. Kalinka

39. Karolina Zmarlak

40. Kaufman Franco

41. Lanvin+^

42. Lela Rose+

43. Loro Piana

44. Maison Martin Margiela*

45. Maison Rabih Kayrouz

46. Mantu

47. Marc Jacobs*+^

48. Marni*+^

49. Mary Katrantzou+

50. Michael Kors*+^

51. Missoni*+^

52. Moncler*+^

53. Monique Lhuillier

54. Naeem Khan+

55. Narciso Rodriguez+^

56. Nina Ricci*+

57. Oscar de la Renta*+^

58. Pamella Roland

59. Paule Ka

60. Peter Pilotto*

61. Piazza Sempione*+

62. Proenza Schouler*

63. Ralph Lauren+^

64. Reed Krakoff*+

65. Rick Owens*+

66. Roberto Cavalli*+^

67. Roland Mouret

68. Saint Laurent*+

69. St. John*

70. Stella McCartney*+^

71. Talbot Runhof

72. Thakoon*+

73. The Row*

74. Valentino*+^

75. Vera Wang+^

76. Versace+^

77. Wes Gordon

78. Yves Saint Laurent+^

79. Zac Posen*^


7

The brick & mortar retail operation is the steady portion of the business

Number of Neiman and Bergdorf stores

R E

T A

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S T

O R

E

Brick and mortar revenue

Neiman's brick & mortar retail stores

Source: Company filings, Bloomberg

The tailwind from the Great Recession has helped Neiman's same store sales and

operating margins grow

There is less competition in high brick and mortar retail because of competitors'

push towards the middle market. Nordstrom plans to double its Rack stores, while

Saks already has 60% of its store portfolio in outlet formats.

As online expands in Asia there may be future opportunity to build brick and

mortar stores in Asia (e.g., Hong Kong, Shanghai, Macau, etc.)

$420

$440

$460

$480

$500

$520

$540

$560

$2,000

$3,000

$4,000

2010 2011 2012

Specialty Retail Store Revenue Sales per square foot

41 42 43 43 44 43

0

5

10

15

20

25

30

35

40

45

2008 2009 2010 2011 2012 Apr-13


8

Long term debt

Neiman's repayment schedule

C A

P I T

A L

S T

R U

C T

U R

E

Comparable co.'s long term debt to LTM EBITDA1

Neiman has an aggressive capital structure but has few

required payments until 2018

Neiman has a debt to EBITDA ratio of 4.4x

Neiman has a minor payment in 2016 but must refinance the majority of its long

term debt in 2018

This is a very aggressive capital structure for a department store because of lease

payment obligations

Proceeds from the IPO will be used to buyout existing shareholders, not to pay

down debt

0 0 0 20 0

2,560

122

0

500

1,000

1,500

2,000

2,500

3,000

2013 2014 2015 2016 2017 2018 2028

Asset based revolver Senior secured term loan

2028 debentures

0.7x

1.5x 1.7x

4.4x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

Saks Nordstroms Macy's Neiman1As of 8/17/13

Source: Company filings, CapIQ


9

What is Neiman worth?

C O

M P

S

Neiman comp set1

Neiman is the most elite luxury department store. A modest premium is applied to

median multiple of the comp group

Saks is trading at a small premium because of the recent offer by Hudson Bay (a

4.5% premium to the close before the offer)

The implied P/E multiple shows the consistency and validity of the comparables

analysis

Enterprise

Value Revenue EBIT EBITDA EV/Revenue EV/EBIT EV/EBITDA

Macy's $22,492 $27,878 $2,690 $3,730 0.81x 8.4x 6.0x

Nordstroms $13,036 $12,462 $1,359 $1,801 1.05x 9.6x 7.2x

Saks $2,610 $3,187 $145 $266 0.82x 18.0x 9.8x

Average 0.89x 12.0x 7.7x

Neiman $4,535 $428 $611

Implied Multiple 1.00x 10.5x 8.0x

Enterprise Value $4,535 $4,495 $4,886

Net Debt (2,633) (2,633) (2,633)

Market Cap $1,901 $1,862 $2,253

LTM Implied P/E 12.7x 12.4x 15.0x

Comps commentary

1As of 8/17/13



10

Total revenue and online revenue

O N

L I N

E

R E

T A

I L

Online revenue as a percentage of total revenue

Internet sales will be an increasingly important part of

Neiman

Source: Company filings

0

1,000

2,000

3,000

4,000

5,000

2010 2011 2012 LTM

Total revenue Online revenue

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%

22.0%

2010 2011 2012 LTM


11

Recent ecommerce developments

According to the WSJ, ecommerce represents 20-30% of Chinese retail sales. Among young

shoppers this can be up to 50%

A PWC study found that more than 25% of consumers were driven online because they could not

find the desired goods in a brick and mortar location

Frank Lavin, the founder of Export Now, a company that runs ecommerce stores in China for

foreign companies, wrote, "Foreign firms do extremely well in the premium space, where

quality oriented companies… can appeal to the more affluent customer."

O N

L I N

E

R E

T A

I L

Neiman recently launched international shipping from its ecommerce site to over 100 countries

In Q3 2012, Neiman invested $29.4mm in Glamour Sales Holding Limited, an off-price flash

sales website based in Hong Kong

Recently, Neiman increased its ownership to 44% and partnered with the company to launch a

site in Mandarin targeting Chinese consumers

Neiman has a team now based in Shanghai, providing it a "feet on the ground" perspective

Asian opportunity

Internet sales will benefit from Neiman's expansion into

China

Source: Company filings, WSJ


12

What would Neiman be worth as an internet and brick &

mortar company?

S O

T P

SOTP Multiples valuation

*Corporate expenses were allocated evenly between the two divisions


Operating Earnings 2010 2011 2012 LTM Multiple Total

Specialty Retail Stores 273 345 391 395

Amort of intangible assets & favorable leases (73) (63) (50) (48)

Corporate expenses (40) (66) (68) (30)

Adjusted brick & mortar op earnings 159 217 273 318 8.0x 2,542

Online 113 113 132 151

Equity in loss of foreign e-commerce retailer 0 0 (2) (10)

Corporate expenses (40) (66) (68) (30)

Adjusted online op earnings 73 47 63 110 25.0x 2,756

Total (EV value using EBIT multiples) 232 264 335 428 5,298

Net Debt (2,633)

Equity Value 2,665

Brick and Motrar Revenue 3,011 3,245 3,467 3,550

Online Revenue 682 757 879 984 2.0x 1,969

Total 3,693 4,002 4,345 4,535

Brick and mortar value 2,542

EV 4,511

Net Debt (2,633)

Equity Value 1,877


13

What would Neiman be worth as an internet and brick &

mortar company?

I N

T E

R N

E T

C O

M P

S

Internet Comp Set1

Internet Comp Set Commentary

Using multiples that are at the low end of the range (25x EBIT or 2x sales) Neiman's

enterprise value is $4.5bn – $5.3bn

These are not perfect comps for Neiman but they show the valuation premiums

that are being attached to ecommerce retailers

While the retail side of the business receives a lower valuation, the premium that

is attached to the internet side of the business more than makes up the difference

($2.5bn for the brick & mortar business and $2.0bn to 2.8bn for online - depending

on the multiple - for a total of $4.5bn to $5.3bn)

EV Rev

1 year

Rev

Growth EBIT

EBIT

Margin EBITDA

EV/

Rev

EV/

EBIT

EV/

EBITDA

Amazon 125,709 66,848 23.0% 638 1.0% 2,924 1.9x 197.0x 43.0x

Groupon 5,212 2,417 17.9% 63 2.6% 133 2.2x 82.7x 39.2x

RetailMeNot 1,615 156 80.0% 50 32.3% 64 10.4x 32.1x 25.2x

Overstock 618 1,203 13.9% 21 1.7% 36 0.5x 29.9x 17.1x

Neiman

Online 984 17.2% 110 11.2%

1As of 8/17/13



14

Discounted Cash Flow Model: $4.7bn

D C

F

DCF Model

2010 2011 2012 2013 2014 2015 2016 2017 TV

Revenue 3,693 4,002 4,345 4,609 4,823 5,061 5,326 5,621 5,845

Growth 1.4% 8.4% 8.6% 6.1% 4.7% 4.9% 5.2% 5.5% 4.0%

Net credit card revenue 59 46 52 50 50 50 50 50 50

COGS (2,418) (2,589) (2,795) (2,978) (3,135) (3,290) (3,462) (3,653) (3,800)

Gross profit 1,334 1,459 1,602 1,681 1,738 1,821 1,914 2,017 2,096

SG&A (887) (934) (1,017) (1,083) (1,133) (1,189) (1,252) (1,321) (1,374)

D&A (215) (195) (180) (172) (167) (162) (156) (150) (90)

Operating profit 232 330 405 425 438 470 507 547 632

Operating margin 6.3% 8.2% 9.3% 9.2% 9.1% 9.3% 9.5% 9.7% 10.8%

Taxes 4 (18) (88) (116) (121) (133) (146) (161) (173)

Non levered earnings 235 312 317 309 317 338 360 386 460

Working capital delta (60) (28) (34) (33) (37) (41)

Depreciation 172 167 162 156 150 90

CapEx (135) (90) (90) (90) (90) (90)

Free cash flow 286 366 376 393 408

TV 6,219

Discount factor 90.1% 81.2% 73.1% 65.9% 59.3% 53.5%

Present value 258 297 275 259 242 3,325

Enterprise value 4,656


15

D C

F

Gross margin & cost of capital sensitivity analysis

Discounted Cash Flow Model: $4.7bn

Sales per square foot annual increase: $5

New Neiman/Bergdorf stores: 0

Annual net new Last Call stores: 2

Gross margin: 35%

SG&A as % of rev: 23.5%

Tax rate: 37%

Terminal growth rate: 4.0%

Cost of capital: 11%

Days of inventory outstanding: 120 days

Days payable outstanding: 42 days Cost of Capital

13.0% 12.5% 12.0% 11.5% 11.0% 10.5%

32.0% 2,682 2,843 3,024 3,230 3,465 3,738

33.0% 2,984 3,164 3,367 3,598 3,862 4,168

34.0% 3,285 3,485 3,710 3,966 4,259 4,598

35.0% 3,586 3,806 4,053 4,334 4,656 5,028

36.0% 3,888 4,127 4,396 4,702 5,053 5,458

37.0% 4,189 4,448 4,739 5,070 5,450 5,888

38.0% 4,490 4,769 5,082 5,438 5,846 6,318

Gro

ss m

arg

in

Terminal growth & cost of capital sensitivity analysis Assumptions

Cost of Capital

13.0% 12.5% 12.0% 11.5% 11.0% 10.5%

2.50% 3,197 3,365 3,551 3,758 3,990 4,252

3.00% 3,314 3,496 3,700 3,927 4,184 4,476

3.50% 3,443 3,642 3,866 4,118 4,404 4,732

4.00% 3,586 3,806 4,053 4,334 4,656 5,028

4.50% 3,747 3,990 4,266 4,581 4,946 5,373

5.00% 3,928 4,198 4,508 4,867 5,285 5,781

5.50% 4,133 4,437 4,789 5,200 5,686 6,271

Term

inal gro

wth


16

Range of enterprise values

V A

L U

A T

I O

N

Football field: EV

$3,806

$4,495

$4,511

$5,028

$4,886

$5,298

$2,000 $3,000 $4,000 $5,000 $6,000

DCF

Traditional Comps

SOTP Internet Comps


17

Risks

R I S

K S

Online retailers increasingly encroach on Neiman's business lowering margins and

reducing sales

International shipping reduces margins (though the contribution margin would still

likely be positive)

The exclusivity of Neiman's is tied to the exclusivity of the brands and designers

sold at Neiman. If brands become less exclusive this lessens the exclusivity and

allure of Neiman as well

Neiman's buyers do a poor job of refreshing clothing offerings

2018 debt payment is unable to be rolled over – this would bankrupt the company

Risks


18

The IPO should price at $1.9bn

C O

N C

L U

S I O

N

Neiman should price at $1.9bn

This value implies a price to earnings multiple of 12.7x, a EV to EBITDA multiple

of 10.6x, and a 1.0x revenue to EV multiple

Neiman would trade at a slight premium to Nordstroms, Saks, and Macy's for

EV/EBITDA and EV/Revenue but would trade at a discount for P/E1

The number of shares to be sold has not been released

Conclusion

1As of 8/17/13

neiman marcus ipo valuation

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