Bankruptcy documents reveal that Neiman Marcus has been leaning heavily on outside consultants and an online marketing firm as it has navigated heavy debt and the devastating closures of its stores during coronavirus.
The documents also reveal inner details of the company’s workings. Chanel, Gucci and Dolce & Gabbana, its top fashion-label creditors, appear to be top-selling brands. Monument Consulting is the biggest creditor, owed $10 million, followed by Rakuten, owed $7.8 million. All of Neiman Marcus’s creditors will have an opportunity to address the company and the US bankruptcy court at a creditors’ hearing on 16 June.
Neiman Marcus is part of a spate of bankruptcy filings among US companies both heavily indebted and under pressure from forced coronavirus closings, which have laid bare internal weaknesses. Retailers J.Crew and JCPenney and smaller labels True Religion and John Varvatos have also filed for bankruptcy protection.
Retail futurist Doug Stephens expects more filings will follow in the coming months as retailers run out of ways to negotiate leases and other debts. “What we will see is a degree of panic in the market. Creditors are going to become very nervous when this becomes a case of more retailers falling into the abyss,” he says.
The problems facing traditional retailers didn’t start with Covid-19; rather, those that were facing “significant challenges” before the pandemic are “the ones that are filing for bankruptcy first”, says James Van Horn, a partner at the law firm Barnes & Thornburg and a specialist in retail bankruptcy. But the process isn't a death sentence, and some companies do emerge with fewer stores and less debt, though insolvency experts say it’s becoming harder and harder.
Neiman Marcus hopes to exit bankruptcy in the autumn with a $750 million deal from creditors that provided its initial bankruptcy loan. It does not intend to conduct liquidation sales or mass closures among its 40-plus stores. It has also shuffled luxury e-commerce platform Mytheresa to an independent operation, beyond the reach of creditors.
“Luxury has always been about interpersonal relationships and we give our brand partners unique access to our loyal luxury customers like no one else can,” Geoffroy van Raemdonck, chairman and chief executive of the Neiman Marcus Group, told Vogue Business by email.
Unlike European insolvency laws, where a vast majority of cases tend to end in a company’s liquidation rather than fresh start, Chapter 11 in the US has proved an important tool for companies seeking to survive the crisis, offering a well-trodden path to free themselves of large costs or obsolete business models. US labels like Michael Kors and Tommy Hilfiger showcased its strength, using it to turn around stricken businesses in 1993 and 1977, respectively.
When a company files for Chapter 11 protection, it normally results in one of three outcomes: reorganisation (J.Crew), a conversion to Chapter 7 bankruptcy, otherwise known as liquidation (Sonia Rykiel) or a potential sale (Barneys and JCPenney). Most Chapter 11 cases aim to confirm a reorganisation plan, although that may not always be possible. Stephens describes it as “an opportunity to wipe the slate clean”.
Once a company files for bankruptcy, the clock is ticking on its effort to win approval of the bankruptcy court to stay alive. “In Neiman Marcus’s case, a majority of creditors have agreed to the plan. The more of your creditors you have onboard, there’s a higher likelihood you will emerge from bankruptcy successfully,” says Moody’s vice president Christina Boni.
Financially distressed companies have increasingly used bankruptcy as the preferred method to sell significant assets or entire businesses, as it carries numerous benefits. For one, bankruptcy sales generally enable buyers to obtain assets at more favourable prices than they would pay if the sale was completed outside of bankruptcy.
Marquee Brands had previously acquired the intellectual property of BCBGMaxAzria, BCBGeneration and Hervé Léger for $108 million in 2017. It partnered with Centric Brands, which owns labels like Hudson and Zac Posen, to produce apparel for these brands and to handle retail and e-commerce. When Centric filed for bankruptcy in May, Marquee took back the licence for the BCBG Group to focus on e-commerce and wholesale.
Turnarounds like these require funding, which normally comes in the form of debtor-in-possession (DIP) loans from a retailer’s existing lenders. Neiman Marcus, for example, was already in negotiations with lenders weeks ahead of its filing, having arranged $675 million of DIP funding to aid operations.
“We expect [Neiman Marcus] to be able to emerge from the crisis and revive its online sales. We are collaborating ardently with them to surface new opportunities and support its growth as the economy revitalises. We have informed our community about Neiman Marcus’s filing and what to expect from their affiliate relationships,” says Amit Patel, CEO of Rakuten Americas. The marketing arm of the Japanese e-commerce giant helps retailers like Neiman Marcus advertise products online through sites such as Facebook and Google.
As part of its restructuring plan, creditors will take control of Neiman Marcus in exchange for cancelling $4 billion of debt (the retailer’s debt totals about $5 billion). In March, Neiman said that it would shutter most of its off-price Last Call stores by the first quarter of fiscal 2021. In the shorter term, it plans to reopen its 43 Neiman Marcus stores and two Bergdorf Goodman stores once it is safe to do so.
Neiman’s existing customers are loyal — about 35 per cent of the group’s revenues comes from the retailer’s credit cardholders, according to the filing — but it needs to entice new customers in a way that remains true to its brand. Both management and industry observers are optimistic about the department store’s revival.
Van Raemdonck believes that seamless online and offline integration will be crucial to the group’s recovery. For example, a pilot with two virtual stylists increased to about 60 a year ago, and now the company employs 3,500 sales associates who use digital tools to curate looks, based on personal interaction with a customer and information from past purchases and searches, “to drive revenue while most stores are closed”, he says.
However, Covid-19 has made the bankruptcy process more unpredictable by delaying court proceedings. “There are some preferences where there’s no activity going on, which has never happened before in this country,” says Van Horn.
Plans could also be derailed if the economic climate turns out to be worse than expected, or new outbreaks force stores to close again. About 260,000 US stores have closed over the past month, according to Global Data Retail.
The demise of department stores will continue for the next two quarters, says Jane Hali, chief executive of Jane Hali & Associates. “Brands will need to be distributed on pure-play websites,” she advises. “Neiman’s was in trouble before Covid-19 so I am not sure what will make it more successful this time around [when] its customers are buying from luxury pure-play retailers like Net-a-Porter.”
For Stephens, survival will depend on numerous factors, such as a store’s safety measures. He says: “Are customers going to have their temperature taken before they go in? Do they have to wear masks? How many people are allowed in the store? Some businesses might be pinning their hopes on consumers returning in numbers to retail, but things won’t go back to normal. Until there is a vaccine, there is always going to be a percentage of the population that will not be going back to crowded stores and shopping centres.”
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