It’s a good-news-bad-news week for the Neiman Marcus Group.
America’s most luxurious department store chain on Friday opens a new store in Fort Worth in its home state of Texas, where Neiman’s enjoys strong popularity. But the retailer’s challenges in many locations across the country have not been overlooked by Standard & Poor’s, which on Thursday stated, “NMG’s operating performance has deteriorated in recent quarters, with mid- to high-single-digit declines in same-store sales and meaningful margin erosion leading to further weakening in credit metrics.”
The credit ratings agency lowered its ratings to CCC+ from B-, putting it deeper in junk-bond status. S&P said NMG’s operating performance “will remain challenged and that the capital structure is unsustainable on the long term with leverage over 10x and limited prospects for a substantial rebound in EBITDA.”
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S&P indicated a one-in-three chance of again lowering the ratings over the next year or so. “We believe the department store and apparel retail markets will remain weak and that Neiman Marcus’ operating performance will remain under pressure. We could lower the rating if we came to envision a specific default scenario.
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“Trends such as weak mall traffic, the highly promotional retail-apparel environment and cautious consumer spending continue to weigh heavily on Neiman Marcus’ operating performance and EBITDA,” said credit analyst Helena Song. “We believe these meaningful industry headwinds, both secular and cyclical, will likely hinder meaningful EBITDA recovery, and as such we project adjusted leverage in the low 10x range and interest coverage in the high-1x area over the coming year.
“Although unlikely in the next 12 months, we could revise the outlook to stable or raise the rating if the company can restore revenue and profit growth and return to positive free operating cash flow. Such a scenario would most likely be a result of improved operating performance such that leverage appears manageable and we do not anticipate the company would consider a restructuring of its obligations, including the potential for a distressed exchange. We estimate that EBITDA would need to rise more than 25 percent to drop leverage to about 8x.”
Neiman’s, as well as other upscale department and specialty stores, has been hit by declining tourist spending and challenges in the luxury market generally. In its quarter ended Oct. 29, 2016, the group reported a net loss of $23.5 million compared to a $10.5 million loss for the same period a year ago. Adjusted earnings before interest, taxes, depreciation and amortization were $122.9 million compared to adjusted EBITDA of $164.3 million for the year-ago quarter. Total revenues of $1.08 billion represented a 7.4 percent drop from total revenues of $1.16 billion for the quarter a year ago. Comparable revenues fell 8 percent.
NMG owners Ares Management and Canadian Pension Plan Investment Board were considering selling the chain, possibly through an initial public offering, which was scrapped last year. Hudson’s Bay Co. has been eyeing Neiman’s for some time, though its attentions lately seem to have shifted toward possibly buying Macy’s. For now, a sale of the $4.95 billion NMG Group seems unlikely given the state of the business and the price that would be asked considering the owners bought the retailer for $6 billion in 2013. Aside from Neiman Marcus and Bergdorf Goodman, the group operates Horchow, Last Call, Cusp and Mytheresa.com