Neiman Marcus Files For Bankruptcy, Felled By Store Closures And Too Much Debt

Neiman Marcus has become the first American department store to go bankrupt amidst the coronavirus pandemic, after prolonged store closures zapped sales and made it impossible to pay its loans.

The Dallas-based luxury retailer filed for Chapter 11 bankruptcy protection in Texas on Thursday and will seek to eliminate $4 billion in debt, putting its lenders in control. The company was downgraded last month by S&P Global Ratings, which cited an “elevated risk” of bankruptcy or restructuring.

“Prior to COVID-19, Neiman Marcus Group was making solid progress on our journey to long-term profitable and sustainable growth,” said CEO Geoffroy van Raemdonck in a statement. “However, like most businesses today, we are facing unprecedented disruption caused by the COVID-19 pandemic, which has placed inexorable pressure on our business.”

Neiman Marcus did not say whether it planned to close stores. It has secured $675 million in debtor-in-possession financing from lenders to fund operations during the restructuring, and $750 million in exit financing from its lenders.

The debt-laden company essentially ran out of options in the wake of store closures that took a heavy toll on its sales. In mid-March, it temporarily closed all 43 of its Neiman Marcus stores, as well as 24 Last Call locations and two Bergdorf Goodman stores in New York City, and only began the process of re-opening some stores last week.

Neiman Marcus has been saddled with debt since it was acquired for $6 billion by private equity firm Ares Management and the Canada Pension Plan Investment Board in 2013, leaving it with about $4.8 billion in long-term borrowings, according to its latest public filings. It was previously owned by private equity firms TPG and Warburg Pincus LLC, who paid about $5.1 billion for the company in 2005.

Last year, the company worked out an agreement with lenders to extend the due date on a chunk of its loans, buying it some time as it attempted to turnaround the business.

However, it skipped several of those payments last month, which started the clock on a potential bankruptcy or restructuring unless it found a way to work out a deal with lenders or come up with the cash. Its grace period on its loans reportedly ranged from five to 30 days. In a letter to the board of directors the day it skipped its payment, bondholder Marble Ridge Capital said it already considered the company in default on its payments and it would “take all necessary actions to protect its rights.”

“Neiman Marcus has remained highly leveraged for several years. We continue to view its capital structure as unsustainable,” wrote S&P analysts in an April note. “In light of the significant headwinds stemming from the coronavirus pandemic and our expectation for a U.S. recession this year, we believe the company’s prospects for a turnaround are increasingly low.”

Other department stores are working to avoid a similar fate as they reel from stay-at-home orders that have made clear their utter dependence on brick-and-mortar stores. Macy’s said it lost “most” of its sales during the first two weeks that stores were closed, prompting it to furlough the majority of its 125,000 workers. during the first two weeks that stores were closed, prompting it to furlough the majority of its 125,000 workers. J.Crew filed for bankruptcy earlier this week, and JCPenney
JCP
and Lord & Taylor are also reportedly considering bankruptcy.

Department stores are considered more at risk of defaulting on their loans than any other consumer sector, according to a recent report from S&P Global Market Intelligence. The odds of default in the next twelve months: 42%.

Neiman Marcus was started in 1907 by Dallas siblings Herbert Marcus, Sr. and Carrie Marcus Neiman, along with her husband A.L. Neiman. The high-end store became a haven for wealthy shoppers looking for fashionable apparel and accessories. Neiman Marcus didn’t open its first store outside of Texas until 1965, but then went on to expand to more than three dozen locations in major cities across the U.S. In 1972, it purchased Bergdorf Goodman.

However, it has faced competition from other high-end department stores like Saks Fifth Avenue, Bloomingdale’s and Nordstrom, plus a new generation of online-only luxury sites like Farfetch and Net-A-Porter. Brands have also increasingly invested in forging a relationship with customers and selling directly to them.

In an effort to draw shoppers to its stores, Neiman Marcus has begun introducing new services, like manicures, shoe repair and custom hat design. Last year, it invested in luxury resale site Fashionphile, which sells pre-owned handbags and accessories. Earlier this year, it said it would be closing most of its Last Call locations, marking an exit from the off-price space.

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