Neiman Marcus: A Balancing Act at the Margins

Luxury retailer Neiman Marcus reported fiscal 3rd quarter earnings yesterday, and investors were given some more insight into the continued struggles of the high-end sector. Though no longer a public company, they still file quarterly reports and hold conference calls, which proves useful for comparison purposes as well as offering a view on how luxury retailers are coping in an extremely tough environment.

The company reported their second consecutive quarterly loss, as total sales were down 23.8% from last year and comparable same-store sales declined by 25.1%.

The specialty retail segment, which includes Neiman Marcus and Bergdorf Goodman stores, saw a same-store sales decline of 27.1%, while the direct-to-consumer business was down 14.3%:

Determined to counteract the steep sales declines and to compete with the deep discounts competitors were offering, such as the 70% off sales at rival Saks (SKS) during the holiday season, they were forced to resort to severe markdowns at the end of the year. Though price cuts were not as drastic in the latest quarter, gross margins were still down over 350 basis points from the same quarter last year:

In order to offset lower sales, the company disclosed a merchandising strategy which will mix in more lower-priced goods while still trying to maintain the premium image. “We’re not vacating the top price point,” CEO Burton Tansky said on the conference call. However, implementing the strategy will take time – in the meantime, the company will continue to offer promotional events to try and boost sales, and also described cost-cutting measures which are expected to reduce capital spending in its next fiscal year by 25%. Earlier this year, they announced plans to reduce the workforce by about 3%, on top of the roughly 18% they have cut over the last 2 years. They will also re-examine planned store openings and work with suppliers to obtain a better product mix.

While almost all retailers have been hit by the decline in overall consumer spending, the luxury retailer has been hit especially hard as consumers continue to trade down. Their pain has been discounters’ gain, as companies such as Century 21 and TJX (TJX) are able to take excess inventory off the hands of struggling department stores and turn it around for deeply discounted prices. Also, the sector might find it hard to get shoppers to pay up again after getting spoiled by all the sales and promotions.

Or as Tansky put it, “It can be challenging to adjust customers to a full-price mentality when so much has been sold at a discount.”

Looking ahead, Tansky said “We believe that the recovery is tentative and any improvement will be gradual,” Looking at their monthly sales results, it’s easy to see the lack of confidence:

Overall, the sector will most likely struggle to adjust to the “new normal”, and it will take time to align inventories with reduced demand. The company said inventories were down 9.7% from the prior year, while on a comparable basis they decreased 12.3%. Analysts don’t expect results from luxury retailers to improve anytime soon, with a report out from Claudia D’Arpizio of Bain & Company estimating a 2011 recovery.

However, many others suspect we may never return to the glory days of conspicuous consumption, and frugality is here to stay…

Disclosure: No Positions

Comments

[Just Say Whoa!:]

Back in 1980, as a college student, I paid $75 for a Ralph Lauren Polo shirt at Needless Markups.

In 2008 dollars that would cost $193.52.

Now, that I'm not so young and foolish, I usually pay less than $25 for my shirts at Target...

Jun 11 11:42 AM

[Moon Kil Woong:]

How a company that pays their employees a bit higher than most retailers and marks their product up 16x looses money just goes to show how inefficient they are.

Furthermore, compond the fact that their product is marginally better at best and equal to others at worst and I would say they vacated their premium position a long time ago. Either start offering gold thread in all your clothes and bon bons at the door or start marking down. Needless Markup's customers should be poster children for the rich and stupid (or wanna act rich and be stupider). A fool and their money are soon parted (unless you are spending someone else's hard labor).

Jun 11 11:09 PM