To preserve its liquidity, Neiman Marcus Group has elected, for the interest period April 15 through Oct. 14, to make payment-in-kind interest payments on its debt rather than cash interest payments, according to a Friday filing with the Securities and Exchange Commission.
The payment covers interest due on $600 million due in 2021, and the interest to be paid is 9.5%, according to the filing.
Last month, the struggling luxury department store said it would "explore and evaluate potential strategic alternatives," including a possible sale of the company or other assets.
Neiman Marcus' $4.9 billion debt burden (and counting) has added to the woes of the declining luxury department store. In December, leading GlobalData Retail Managing Director Neil Saunders called the company's debt “completely unsustainable."
“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,” Saunders warned in a note emailed to Retail Dive. “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.” Indeed, the department store pulled its IPO plans before the end of January this year; its plans to go public had been initiated in 2015.
Despite its mounting debt, Neiman Marcus doesn’t have any major debt maturity until October of 2020, Philip Emma, a retail analyst at Debtwire told Retail Dive, adding that the company isn't forced into making a decision on a sale in the near future. That said, it could be an attractive buy for potential suitors, which reportedly include Canadian department store conglomerate Hudson's Bay Company.
“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 low growth environment for retail, the ability to add sales cheaply could be viewed as compelling.”
Neiman Marcus seemed poised to return to Wall Street trading thanks to an omnichannel strategy that includes in-store pickup of online orders and an innovation lab to further blur the lines between its physical and digital channels. But revenues have been hit by a massive investment to convert its legacy merchandising and inventory systems into a single new tech-based system, dragging down business in the first quarter to the tune of $30 million to $35 million and same-store sales by 270 basis points.
Perhaps the bigger problem is that the new pace of fashion is simply getting the best of the luxury department store. “The customer has changed the way they shop in several fundamental ways,” CEO Karen Katz said on a conference call late last year. “One is driven by price transparency and the other is what we call ‘buy now, wear now.’ Besides being a treasure trove of merchandise, the internet gives customers greater access to information about price and promotion. They continue to shop for the best deal and the lowest price with less regard for loyalty, channel or brand.”