(Updates with company comments in ninth paragraph.)
Sept. 9 (Bloomberg) -- Neiman Marcus Inc.’s new private- equity owners are buying a luxury chain that’s in danger of running out of room to expand in the U.S. as even well-heeled shoppers pull back.
Ares Management LLC and the Canada Pension Plan Investment Board agreed today to buy the U.S. department store company from TPG Capital and Warburg Pincus LLC for $6 billion.
While Neiman has recovered some of its luster in the past year, sales remain below their 2008 peak. Many Americans are wary amid a weak economy and rather than spending on apparel are upgrading their cars and buying home-related merchandise as the U.S. housing recovery gathers momentum.
“It is a difficult environment for luxury companies these days because we’ve seen fewer foreign visitors and the domestic shopper is carefully cutting back because of the uncertainty,” said Walter Loeb, president of Loeb Associates, a New York-based retail consulting firm.
Luxury spending in the Americas grew 5 percent on a constant-currency basis in 2012, less than half the 13 percent gain of the previous year, according to Bain & Co. estimates.
Neiman’s previous owners also considered taking the department store chain public. That they didn’t probably reflects the difficult retail environment, said Michael Appel, founder of Appel Associates LLC, a Purchase, New York-based retail consulting firm
Chief Executive Officer Karen Katz has worked to spur sales growth by introducing the chain’s Cusp contemporary fashion concept into its namesake stores to attract younger customers, opening an e-commerce site in China, and rolling out more Last Call outlets.
Revenue rose 8.6 percent to $4.35 billion in its last reported fiscal year, ended July 28, 2012. Net income more than quadrupled to $140.1 million. Neiman is larger and more profitable than New York-based Saks Inc., which generated net income of $62.9 million on revenue of $3.15 billion in its last full year.
Katz, a Neiman veteran who assumed the helm in 2010, will stay, said Ginger Reeder, a spokeswoman. Bill Mendel, an outside spokesman for Ares, declined comment. May Chong, a spokeswoman for the Canadian pension plan, didn’t immediately reply to a telephone message and e-mail seeking comment.
Katz may layer in lower-priced products to attract a wider audience, Loeb said. The chain’s full-size stores are already present in major affluent markets on the East and West coasts and Texas. So the company will probably seek growth by developing smaller stores and adding more outlets, he said.
“The operation is very well run, so I don’t think you can squeeze out a lot of new productivity,” said Steven Dennis, the founder of SageBerry Consulting LLC, a Dallas consulting firm, and a former Neiman executive. “The question is how do you get more things out of the core business and are there other things that could create new growth platforms for them? That’s not obvious to me.”
E-commerce sales growth is flattening and international expansion is a big question mark, he said.
Yet “there is a trophy value to owning an asset like Neiman Marcus,” he said. “Barring a recession, it’s a stable, easy-to-understand business with reliable cash flows.”
Neiman Marcus was founded in Dallas by Herbert Marcus, his sister and her husband A.L. Neiman in 1907. Marcus bought out the Neimans in 1928 and his son Stanley ran the stores from 1952 to 1979. Stanley’s son Richard then became CEO until 1988, when he resigned, ending 81 years of family management.
The chain, which runs 41 stores under the Neiman name and two Bergdorf Goodman department stores on New York City’s Fifth Avenue, is known for its Christmas catalog, which offers such gifts as limited-edition McLaren cars for $354,000.
Warburg and TPG paid about $5.1 billion for Neiman in 2005 during a global luxury boom only to watch sales slide after the financial markets crashed in 2008.
“They didn’t expect 2008 to 2011 to happen,” Appel said. “There was this hiatus there with what happened with the Great Recession. It took a period of time for them to get it back on track so that they could be ready to market it.”
Ares and the pension fund will hold an equal economic interest in Neiman, and the chain’s management will retain a minority stake, the buyers said in a statement today. The chain will use some of the purchase price to pay down debt, they said.
Los Angeles-based Ares has invested in Smart & Final Stores Corp., Floor & Décor Outlets of America Inc., and 99 Cents Only Stores, its website says.
The Neiman sale is the second deal in the luxury retail industry in recent months. Hudson’s Bay Co. agreed to buy Saks for $2.4 billion in July, combining Canada’s largest-department store chain with one of the most prestigious U.S. luxury retailers in a deal that may spur the creation of a real estate investment trust. The transaction, which brings together the Lord & Taylor and Saks Fifth Avenue brands, creates a company that will operate 320 stores.
--With assistance from Chris Burritt in Greensboro. Editors: Robin Ajello, Ben Livesey