J. Crew and Neiman Marcus were each faced with a multitude of problems before the coronavirus pandemic forced them to close their stores and ultimately file for bankruptcy, including difficulties in adapting to the boom in electronic commerce and a lack of connection with a new generation of buyers.
But they also shared an increasingly common problem for struggling retailers: a huge debt burden – about $ 1.7 billion for J. Crew and almost $ 5 billion. for Neiman Marcus – from debt buyouts led by private equity firms. Like many other retailers, J. Crew and Neiman over the past decade have paid hundreds of millions of dollars in interest and fees to their new owners when they have to spend money adjusting to an evolving retail environment. And when the pandemic wiped out a large part of their sales, neither needed to seek help, except in court.
“Much of the difficulty in the retail sector has been compounded by participation in private equity,” said Elisabeth de Fontenay, professor at Duke University School of Law who specializes in business finance. “To keep up with everyone’s shift to online shopping, there really needed to be significant capital investment and change, and because these companies were so much in debt when acquired by private equity firms, they n had no capital to make these big changes. . ”
The filings of J. Crew and Neiman Marcus followed a wave of retail bankruptcies in recent years, and many chains, including J.C. Penney, have failed due to the pandemic.
Barneys New York was liquidated in November and Zac Posen, owned by Yucaipa Companies, closed the same month. In March 2019, the North American operation of the Italian brand Roberto Cavalli declared bankruptcy when its private equity owner, Clessidra, did not sell its stake. The British department store chain Debenham’s filed for protection for the second time in less than a year in early April.
“You need so much money to keep stores open, so much money to keep inventory flowing – an average department store will have 2,500 brands – you need to invest in construction, you need to invest in staff and most PE companies don’t want to invest until they start to see a return, ”said Marigay McKee, founder of MM Luxe Consulting and former president of Saks Fifth Avenue.
Private equity firms have worked with retailers for decades. But the collapse from Toys “R” Us in 2017 highlighted how major corporate takeovers could go sideways. The chain had been pledged with $ 5 billion in debt from a debt buyout in 2005 by private equity firms Bain Capital and Kohlberg Kravis Roberts and real estate company Vornado Realty Trust, and it had no sufficient funds to invest in its stores and e-commerce in a period of crucial growth for Amazon and Walmart.
It was eventually liquidated and more than 30,000 workers were laid off. Workers did not receive severance pay – even though creditors, bankruptcy attorneys and consultants received payments – until they puts pressure on pension funds, which invest heavily in funds managed by private equity firms. The situation galvanized politicians and union activists and sparked public outrage.
J. Crew, owner of Madewell, and Neiman Marcus, owner of Bergdorf Goodman, have committed to staying in business, but bankruptcies inevitably raise questions about what the future holds for employees, stores and salespeople.
Bankruptcies have also shown that running retail businesses requires a specific set of skills, particularly in fashion.
Clothing is an almost entirely discretionary purchase, depending not only on economic cycles, but also on consumer tastes and the images of the brands themselves. Private equity funds are often “seduced by hypified names,” said Sandeep Dahiya, associate professor of finance at Georgetown University.
Private equity has been flirting with the fashion trade since at least 1987, when Bahraini company Investcorp began buying shares of the besieged Italian family brand Gucci, reversing the situation of the loss-making business. It was cashed in during a first public offering in 1996, establishing a model for the industry and paving the way for agreements such as the purchase by TPG of Bally in 1999, the acquisition in 2007 of Permira from Valentino Fashion. Group and Jimmy Choo’s triple turnaround from Equinox to Lion Capital at TowerBrook.
Carlyle acquired 48% of the Italian fashion brand Moncler in 2008, while its down jackets were exploding in popularity. It was released in 2014, the year after the release of Moncler. Other private equity deals have had mixed results, but Carlyle’s success – combined with a burgeoning luxury sector, particularly in Asia, and the real estate appeal embodied by store networks – has won over private equity investors. They saw retail as a cash-generating business, with management often made up of founders or families who could be shaken and rationalized.
“Retail was a kind of golden goose for private equity firms, because for an LBO to work, the business must be mature enough with fairly regular cash flows,” said de Fontenay. “Under normal conditions, this is the kind of definition of retail. “
It “works very well as long as the economy and the sector in which you invest continue to grow,” she added. “If the sector shrinks, that is bad news.”
Neiman Marcus was first removed from the market for approximately $ 5.1 billion in a 2005 debt buyout by TPG and Warburg Pincus. The company was later sold in 2013 to a group led by the private equity firm Ares Management and the Canada Pension Plan Investment Board in a $ 6 billion transaction.
Steve Dennis, founder of SageBerry Consulting and director of strategy for Neiman Marcus from 2004 to 2008, said he knew of at least one company that fell short of the price of the second sale “based on significant growth for the to justify “.
“Anything that takes more than an insignificant amount of capital and takes longer to pay is generally not a private equity model,” said Dennis.
Neiman Marcus filed for publication in 2015, but an I.P.O. never materialized. The company, which has declared in court documents that it employs approximately 13,200 people, including 9,500 full-time employees, has spent much of the past two years trying to restructure its debt by about $ 5 billion. , on which she paid hundreds of millions of dollars. in the interest. Its revenues stood at $ 4.9 billion in its latest annual public report, which was for the year ending July 2018.
Moody’s said last May that Neiman Marcus’ debt levels had reached “unsustainable levels”.
One of Neiman Marcus’ most valuable assets – luxury e-commerce retailer MyTheresa – was not part of the bankruptcy case. A group of bondholders has argued since 2018 that the assets of MyTheresa have been improperly transferred to the owners of the company, leaving little to protect holders of the company’s unsecured debt.
Marble Ridge Capital, a hedge fund that owns some of Neiman’s bonds, wrote in a public letter to the owners last month that “you left a business carcass to other stakeholders and put both the legendary franchise of Neiman and thousands of jobs at risk. “
Alex Yankus, an Ares representative, declined to comment. Darryl Konynenbelt, a representative from the Canada Pension Plan Investment Board, declined to comment.
Amber Seikaly, spokesperson for Neiman Marcus, said that since 2014, the company had “invested more than $ 1 billion in capital in our business,” including new and existing stores, technology and its digital presence. .
J. Crew also faced a difficult road after its leveraged buyout of $ 3 billion by TPG and Leonard Green & Partners in 2011. He overcame the fashion faux pas, management changes, quality complaints and general identity crisis. But debt and related expenses have also eroded cash, which has affected the company’s ability to reinvest in its products, supply chain and e-commerce platforms.
Americans for Financial Reform, a consumer advocacy group, estimated that J. Crew had paid more than $ 760 million in dividends and fees to his group of owners since 2011. These distributions are shared with investors in managed funds by private equity firms.
Before leave began during the pandemic, J. Crew had 13,000 employees worldwide, and 4,000 full-time workers, according to court documents.
Luke Barrett, a TPG representative, said that the bankruptcy was “a major disappointment for everyone” and that the investment “ultimately created a loss for TPG and for our investors.”
“When Covid-19 forced the closure of all of the company’s operations, we worked quickly to change the capital structure and create a new ownership structure that will serve the long-term interests of J. Crew, his employees and its customers, “he said. said.
A Leonard Green representative declined to comment.
“One of the defenses of private equity right now is that they say these are already companies in structural decline, and, look, this is one of them,” said Andrew Park, senior policy analyst at Americans for Financial Reform. “But again, having to pay off this debt makes these companies difficult, and when you see these companies blatantly withdrawing money, that was the thing that really got criticism. “
Georgetown professor Dahiya said he expected more bankruptcies from private equity-backed retailers in the current environment and he thought this could potentially become a problem Politics.
“If there is a big bankruptcy or liquidation of a retail business with a lot of job losses and PE is involved,” he said, “it would be like catnip for politicians, because retail is something that affects me and me, unlike, say, chemicals.
Peter Eavis contributed to the report.
Contact Sapna Maheshwari at [email protected] or Vanessa Friedman at [email protected]