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NEIMAN’S NEXT MOVE

Some predict new owners will add stores, but caution against diluting brand

BY SASCHA BRODSKY

Neiman Marcus Group’s new owners face a conundrum: how to juice the revered luxury brand for more profits without draining its cachet. Observers speculate that more flagship stores, a smaller prototype, or a jewelry spin-off could be in the works as the new owners pump the company up for a new public offering down the road.

The trick will be to maintain the exclusivity of the brand during this growth, sources say. “Neiman Marcus has a lot of open road ahead,” said Steven Greenberg, president of the Hewlett, N.Y.-based Greenberg Group, which has advised such upscale companies as Lacoste, Puma and Water Works on real estate decisions. “But as a shopper, I hope they don’t change anything.”

Two equity funds, Texas Pacific Group and Warburg Pincus, announced plans to buy Neiman Marcus Group last month, offering about $100 per share, or $5.1 billion, to take the company private. Texas Pacific also controls retailers J. Crew and Petco.

The company operates 35 Neiman Marcus stores, two Bergdorf Goodman stores and 14 Last Call clearance centers, for a combined 5 million square feet of retail space. Its Neiman Marcus Direct operates print catalog and online businesses under the Neiman Marcus, Bergdorf Goodman and Horchow brands. Under the Neiman Marcus banner, Neiman Marcus Direct offers primarily women’s apparel, accessories and home furnishings. Horchow sells home furnishings, linens, decorative accessories and tabletop items.

The company also owns majority stakes in accessories designer and seller Kate Spade and in Gurwitch Products, maker of Laura Mercier cosmetics.

In the past, the chain has been famously restrained, operating Neiman Marcus stores only in the top luxury markets. Investors and analysts praised the strategy, crediting it with keeping Neiman ahead of competitor Saks Fifth Avenue.

Neiman’s sales reached $555 per square foot for fiscal 2004, up 32 percent from 1997. The company earned $205 million for the year, up nearly double from the previous year, thanks to total sales of $3.55 billion. Even so, observers say, if Neiman Marcus Group sees even one month of slow sales, it could damage the new owners’ return on investment.

“Given the relative strength of the ultra high-end consumer, Neiman Marcus Group has been able to achieve peak levels of operating performance,” wrote Morgan Stanley analyst Greg Fowlkes in a report to investors. “This is going to be hard to top.”

Nevertheless, Warburg Pincus and Texas Pacific in particular will want to make money off the deal. And though the new owners are not retailers by trade, Texas Pacific has a strong team of experts on its payroll, including Neiman CEO Burton Tansky and J. Crew turnaround artist Millard (Mickey) Drexler.

“The motivation behind Texas Pacific and Warburg Pincus’ investment is that they could accelerate the company’s store growth and bring the company public again at a premium,” wrote Stacy Turnof, a Merrill Lynch retail analyst, in a research report.

Texas Pacific and Warburg Pincus have made no public statement about their intentions and could not be reached for comment. But “there is room for up to 50 stores,” said Touk Sinantha, a retail analyst at Chicago-based money management firm Ariel Capital Management.

Others speculate that more Kate Spade stores, a smaller, cheaper spin-off, similar to Barney’s New York’s Co-Op concept, or even a revival of the Galleries of Neiman Marcus jewelry stores that had a brief run in the 1990s could offer new avenues for growth.

As Neiman’s new strategy unfolds, one issue will be important for continued success, says Kurt Barnard, editor of Barnard’s Retail Trend Report. “One of the great attractions of Neiman Marcus is its exclusivity,” he said, “and that cachet could be lost if they have more stores.”