Upscale real estate developer Related Companies may invest in Neiman Marcus — or even acquire the struggling department store — in order to salvage it as an anchor tenant of its massive Hudson Yards development project in New York City’s Far West Side, the New York Post reports.
Executives from the companies met on May 12 at the request of Related chairman Stephen Ross, unnamed sources told the Post.
Neiman Marcus emerged as a major tenant of the $25 billion project three years ago, but the luxury retailer has since faltered badly in an increasingly challenged department store sector. While interested in supporting their tenant, Related Cos. executives are also concerned about the company’s debt, the Post reports.
Neiman Marcus’s debt is emerging as a stumbling block when it comes to investor interest. Canadian department store company Hudson's Bay, with about $2.4 billion in debt of its own, is reportedly in talks to take over Neiman Marcus, but is hoping to avoid taking on Neiman Marcus' full $4.9 billion debt load. Reducing the debt intake will require negotiations with Neiman Marcus’s creditors.
Neil Saunders, managing director of GlobalData Retail, last year warned that Neiman Marcus's debt load is a problem. “In our view, such a debt burden is completely unsustainable for a company of Neiman Marcus’ scale,” Saunders said in a note emailed to Retail Dive in December. “Indeed, even if all interest was frozen and the entirety of operating profit was to be directed to the purpose of paying down the debt, it would take well over 40 years to remove it from the balance sheet. Such a position underlines the fragile nature of the company’s finances, something that hits home when the $72 million quarterly interest payments are appreciated. This acts as a major barrier to the company being sold and makes an IPO far less attractive. It also guarantees that without a significant rise in sales, the company will remain loss making.”
But the department store retailer's troubles only go back about two years, Philip Emma, analyst at Debtwire, told Retail Dive — a sign that it's not too late for the business to be turned around.
“The Neiman Marcus name still has value. It has deteriorated, but it’s still substantial,” Emma said. “There’s a revenue stream to buy at a discount — that’s an intriguing possibility. In a low growth environment for retail, the ability to add sales cheaply could be viewed as compelling.”
Should Related Cos. prop up the department store chain with an investment of its own in order to keep its Hudson Yards development on track, it wouldn't be the first developer to do so. Last year a consortium of mall landlords swooped in at the last minute with $243 million to take over teen apparel retailer Aeropostale, which was facing complete liquidation in bankruptcy.
But such an investment has to be a strategic, long term move and carefully considered, according to Simon Property Group CEO David Simon, who also told analysts last month that the consortium will continue to invest in the teen apparel company to ensure its success. While Simon said he sees department stores as “a great opportunity” for mall operations, the company is being choosy about when it comes to the aid of an ailing retailer. “King of Prussia is a great example, Penney's announced closing,” he said, according to a transcript from Seeking Alpha. “We could have saved that deal, we decided absolutely unequivocally not. We're going to make that a mixed-use development, won't be apparel-oriented.”