US luxury department store retailer Neiman Marcus has become the latest to file for Chapter 11 bankruptcy protection with a deal that will hand the business over to its creditors, as the coronavirus pandemic continues to take its toll on struggling companies.
The retailer entered into a binding agreement with a significant majority of its creditors on 7 May to undergo a financial restructuring to “substantially” reduce debt, and provide access to financing to ensure business continuity.
To implement this agreement, Neiman Marcus started voluntary Chapter 11 proceedings in the US Bankruptcy Court for the Southern District of Texas, Houston Division.
“Prior to Covid-19, Neiman Marcus Group was making solid progress on our journey to long-term profitable and sustainable growth,” says CEO Geoffroy van Raemdonck. “We have grown our unrivalled luxury customer base, expanded our industry-leading customer relationships, achieved higher omni-channel penetration, and made meaningful strides in our transformation to become the preeminent luxury customer platform. However, like most businesses today, we are facing unprecedented disruption caused by the Covid-19 pandemic, which has placed inexorable pressure on our business.”
As part of the process, Neiman Marcus has secured debtor-in-possession (DIP) financing of US$675m from creditors to enable the business to operate throughout proceedings.
In an update on its business operations, the retailer said the temporary closures of some Neiman Marcus, Bergdorf Goodman, and Last Call stores, have been extended through to 31 May, as has its furlough and temporary salary reduction schemes. Sales are, however, continuing online.
Last week, J.Crew Group also filed for Chapter 11 bankruptcy protection. The group, which operates 181 J.Crew retail stores, 170 factory stores and 140 Madewell stores, has been labouring under a huge debt burden – like Neiman Marcus
Reasonable prospects for survival
As Neil Saunders, managing director of GlobalData Retail, explains: “As a retailer laden down with debt, Neiman Marcus was always living on borrowed time. In normal circumstances the debt burden prevented it from turning a profit and restricted its ability to invest and evolve in a time of immense change in retail.
“The coronavirus crisis has severely exacerbated these problems as sales have dwindled and Neiman Marcus is struggling to pay the interest and capital on what it owes. In order to put the business on a sustainable footing there was no option but to restructure under the protection of bankruptcy.
“The $675m of financing that Neiman Marcus will receive in order to see it through the present downturn underlines the fact that investors still see a future for the chain. We concur with their view that, once the debt has been eliminated or at least reduced, there are reasonable prospects for survival.
“While Neiman Marcus has some proposition issues, it is in a much better position than most other US department stores. Its shops are well maintained and are mostly within strong malls, it has a loyal base of shoppers, occupies a distinct niche in the luxury space, and has made some strides into digital. In short, there is a place for Neiman Marcus in the post-coronavirus world.
“That does not mean there are no issues to address. Indeed there are plenty of steps Neiman Marcus will need to take to ensure its longer-term survival.
“One of these is connecting with younger luxury shoppers. To date, Neiman Marcus has done a poor job of this and relies on its older, more traditional customer base to drive trade. To remain viable over the decades ahead, it needs to attract new shoppers and introduce them to what Neiman Marcus has to offer. Using digital channels more effectively is also vital…if it is to both attract new shoppers and stay on top of changing consumer habits.
“Another issue is dealing with the rise of direct-to-consumer sales by big luxury brands. This has undermined many department stores and although it is a little more insulated because of its loyal clientele, Neiman Marcus is not immune. A fightback is needed to capture more custom, and this has to involve making the offer and products more unique and not simply being a showcase for other brands.
“There is also the issue of stores. Although Neiman Marcus probably doesn’t need to shut stores as it has relatively few of them and they are in good malls, with more and more sales migrating online the existing size of some of the stores is questionable. In our view, there are some shops in the chain that are just too large and which do not attract enough footfall to justify their size. A rightsizing of the store base should be on the cards to optimise productivity.
“All of these are important issues that need to be addressed, and being free of the debt burden will allow Neiman Marcus the breathing space it needs to future-proof the business. However, these changes will not be easy, especially in the post-coronavirus landscape. It will take a lot of creativity and imagination to drive them through. However, Neiman Marcus does have the flair and acumen to make this happen.”