Retail Neiman Marcus Group LTD LLC Credit Research Company Note Ratings Outstanding Current Security Coupon Maturity (M/S&P) ($ millions) Price YTW STW Yield Term Loan L + 325bps 10/25/20 Caa1 / CCC+ $2,854 80.50 11.26% - 5.28% 1L Nts 7.125% 6/1/28 Caa1 / CCC+ $125 76.00 10.90% 865.32 9.38% Sr Nts 8.000% 10/15/21 Caa3 / CCC- $960 60.50 22.40% 2,063.04 13.22% Sr PIK Nts 8.75/9.50% 10/15/21 Caa3 / CCC- $600 56.50 23.21% 2,143.17 15.49% Source: Company Reports, Bloomberg L.P., and Cowen and Company April 18, 2017 Negative Bias Toward NMG Securities Kirk Ludtke 646.616.3051 [email protected]Sean Kiernan 646.616.3056 [email protected]Key Data Symbol OTC Un: NMG The Cowen Insight NMG faces macro/secular headwinds that are well established and may be accelerating. The launch of a new inventory system is a likely 2H17 headwind. A take- out by an acquirer, in a creditor friendly way, seems unlikely. The potential dilution from a debt exchange does not seem to be fully reflected in the trading level of the company’s term loan. NMG’s securities are, in our view, overvalued. Summary The company faces macro headwinds that are well established and may be accelerating. The company is also having trouble launching its new inventory management system, NMG One. Management has some levers to pull in order to stabilize the company’s earnings, but our estimates suggest that NMG’s earnings are likely to remain on a downward trajectory. While our estimates suggest that NMG will generated cash deficits going forward, we believe the company will have enough liquidity to reach the maturity of its capital structure, which begins in 2020. NMG announced, on 3/14/17, that it has hired financial advisors and is exploring strategic options, including: the sale of the company or certain assets as well as initiatives to optimize its capital structure. The WSJ reported concurrently that Hudson’s Bay (HBC) and NMG have been discussing some form of business combination. A combination of HBC (the owner of Saks Fifth Avenue and Lord & Taylor) and NMG probably makes business sense. Cowen’s Oliver Chen covers HBC (Market Perform, PT $12/share) and sees potential synergies in purchasing, IT, and over time, a rationalization of the combined footprint. But a near-term transaction in which HBC buys all of NMG seems unlikely given: (1) the weak retail environment, (2) the already high leverage at both companies, and (3) NMG’s relatively modest and uncertain real estate value. Neiman Marcus Group’s (NMG) securities are, in our view, overvalued at current levels. Investors can create NMG through the 1L Debt at approximately 4.8x, which appears reasonable in isolation relative to the trading levels of comparable companies (4.0x to 8.0x). But it is important to note that the credit agreements that govern the company’s secured debt give management significant flexibility to offer the holders of the Senior Notes an exchange into secured debt; a transaction which could be severely dilutive NMG’s existing 1L Debt. A debt exchange seems likely at some point given that it could, without diluting the Sponsors, reduce the company’s overall leverage and cash requirements. An exchange, for instance, of all $1.56 billion of the Senior Notes at 50% of par could, by our estimates, push the trading level of the company’s 1L debt into the 60s, down approximately 15 points from current levels. www.cowen.com Please see pages 21 to 24 of this report for important disclosures. This report is intended for [email protected]. Unauthorized redistribution of this report is prohibited.
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NMG faces macro/secular headwinds that are well established and may beaccelerating. The launch of a new inventory system is a likely 2H17 headwind. A take-out by an acquirer, in a creditor friendly way, seems unlikely. The potential dilutionfrom a debt exchange does not seem to be fully reflected in the trading level of thecompany’s term loan. NMG’s securities are, in our view, overvalued.
SummaryThe company faces macro headwinds that are well established and may beaccelerating. The company is also having trouble launching its new inventorymanagement system, NMG One. Management has some levers to pull in order tostabilize the company’s earnings, but our estimates suggest that NMG’s earnings arelikely to remain on a downward trajectory. While our estimates suggest that NMGwill generated cash deficits going forward, we believe the company will have enoughliquidity to reach the maturity of its capital structure, which begins in 2020.
NMG announced, on 3/14/17, that it has hired financial advisors and is exploringstrategic options, including: the sale of the company or certain assets as well asinitiatives to optimize its capital structure. The WSJ reported concurrently thatHudson’s Bay (HBC) and NMG have been discussing some form of businesscombination. A combination of HBC (the owner of Saks Fifth Avenue and Lord &Taylor) and NMG probably makes business sense. Cowen’s Oliver Chen covers HBC(Market Perform, PT $12/share) and sees potential synergies in purchasing, IT, andover time, a rationalization of the combined footprint. But a near-term transaction inwhich HBC buys all of NMG seems unlikely given: (1) the weak retail environment,(2) the already high leverage at both companies, and (3) NMG’s relatively modest anduncertain real estate value.
Neiman Marcus Group’s (NMG) securities are, in our view, overvalued at currentlevels.
Investors can create NMG through the 1L Debt at approximately 4.8x, which appearsreasonable in isolation relative to the trading levels of comparable companies (4.0x to8.0x). But it is important to note that the credit agreements that govern the company’ssecured debt give management significant flexibility to offer the holders of the SeniorNotes an exchange into secured debt; a transaction which could be severely dilutiveNMG’s existing 1L Debt. A debt exchange seems likely at some point given that itcould, without diluting the Sponsors, reduce the company’s overall leverage and cashrequirements. An exchange, for instance, of all $1.56 billion of the Senior Notes at 50%of par could, by our estimates, push the trading level of the company’s 1L debt into the60s, down approximately 15 points from current levels.
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Summary Continued The company’s Senior Notes trade at levels that, in our view, reflect: (1) someimprovement in the business and/or (2) a debt exchange in which the Senior Notesreceive consideration (most likely in the form of new secured debt) equivalent to atleast 50% of the par value of the Senior Notes. The terms and timing of an exchangeare uncertain. Management may choose to let the company’s results deterioratefurther before pursuing an exchange in order to extract a more severe discount fromthe holders of the Senior Notes. The company may also choose to exchange the CashPay Notes in the near term and the PIK Toggle Notes after the pay-in-kind period.The price disparity between the Cash Pay and PIK Toggle Notes (three or four points)does not, in our view, fully reflect the possibility that the Cash Pay Notes could beoffered an exchange and the PIK Toggles left unsecured for an extended period. GUCrecoveries, in the event of a financial restructuring of NMG, would likely be, in ourview, de minimis.
The primary risk to our bearish thesis is, in our view, the emergence of a strategicbuyer with a long-term and/or global, investment horizon. While we put a lowprobability on this scenario, we can’t rule it out. Both Neiman Marcus and BergdorfGoodman have, in our view, trophy property status.
Valuation The companies that we believe are most comparable to NMG are trading at 4.0x to8.0x LTM Adjusted EBITDA.
TEV $10,179.6 $14,310.9 $9,397.9 $5,461.8 $4,393.9 -
TEV/Adjusted EBITDA:LTM 4.6x 4.9x 5.7x 5.3x 8.3x 5.3xFY1 4.5x 5.0x 5.9x 5.1x 7.0x 5.1xFY2 4.6x 5.3x 5.7x 5.0x 6.8x 5.3xFY3 4.6x 5.3x 5.3x 5.0x 7.6x 5.3xSource: Company Reports, Bloomberg L.P., and Cowen and Company
A high level valuation of NMG’s real estate suggests some, but not a lot relativeto the company’s debt, of underlying asset value. We value NMG’s real estate atapproximately $1.4 billion (+/- $200 million), which is well below the company’s 1LDebt as of 1/28/17 ($3.149 billion). NMG owns both the land and building at only sixof its 85 locations.
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NMG’s stores are, we believe, only in A malls, which gives us some comfort that therewould be interest in the company’s stores if they became available. We grouped thecompany’s stores into four categories: (1) owned building/owned land, (2) ownedbuilding/partially owned land, (3) owned building/leased land, and (4) leased building/leased land. We reduced our valuation of categories #2 and #3 by 50% and 75%,respectively, to reflect the third party ownership of the land underlying the stores inthese categories. A significant portion of the value we attribute to the company realestate is concentrated in the company’s stores in San Francisco, CA ($250 million +/-$25 million) and Beverly Hills, CA ($185 million +/- $20 million). Our valuation of thecompany’s store in San Francisco is consistent with the value Macy’s received from itssale of a nearby building on 2/21/17. Our valuation of the company’s store in Beverlyalso reflects a premium location. We used a range of $150 to $200 / square foot tovalue most of the remaining stores, which we believe is consistent with the valuespaid for Sears (SHLD) stores in A malls by joint ventures between Seritage GrowthProperties (SRG) and each of Simon Property Group (SRG), GGP (GGP), and Macerich(MAC) in 2015.
A significant portion of the value in the company’s real estate, in our view, is likely tobe in its leasehold interests. NMG valued its Favorable Leasehold Commitments (FLC)at the time of its 2013 LBO at $1.068 billion. The company reported FLC of $957 millionas of 1/28/17.
OwnershipOwned Buildings On: Low High Adjustment Low HighOwned land $317.4 $398.0 100.0% $317.4 $398.0Partially leased land 192.3 235.8 50.0% 96.2 117.9Leased land 307.2 409.6 25.0% 76.8 102.4Subtotal $816.9 $1,043.4 $490.4 $618.3
Leases - - - 717.7 957.0Subtotal - - - $1,208.1 $1,575.2Source: Company Reports and Cowen and Company
($ millions) ($ millions)Gross value Net value
We’ve assumed, for illustrative purposes, a debt exchange in which the holders of theSenior Notes receive 1L Debt equal to 50% of the Senior Notes surrendered. If we capthe company’s TEV at 5.0x the company’s LTM Adjusted EBITDA, the implied value ofthe 1L Debt would be in the 60s.
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As of 1/28/17:($ millions) AsUnrestricted Subsidiaries: Reported Exchange Pro FormaNew Secured Nts $0.0 $65.8 $65.8
Consolidated debt:$900 million ABL due 7/25/21 $170.0 $0.0 $170.0Term Loan due 10/25/20 2,854.3 714.3 3,568.67.125% 1L Nts due 6/1/28 125.0 0.0 125.0Subtotal - First lien $3,149.3 $714.3 $3,863.6
8.000% Sr Nts due 10/15/21 $960.0 -$960.0 $0.08.750/9.500% Sr PIK Toggle Nts due10/15/21 600.0 -600.0 0.0Subtotal - $1,560.0 -$1,560.0 $0.0
Total debt $4,709.3 -$779.9 $3,929.5
Net leverage:First lien:As reported 6.0x - 7.5xMarket value 4.8x - 4.8x
Total debt:As reported 9.1x - 7.5xMarket value 7.8x - 7.5x
Market prices:First lien 80.0% - 64.0%Unsecured 58.0% - 58.0%Source: Company Reports and Cowen and Company(a) Pro forma adding back $27 million of adjusted EBITDA lost due to issues with NMG One
While an exchange offer seems likely, the timing and terms are uncertain. The SeniorNotes, in our view, already trade at levels that suggest an exchange offer in whichthe holders of the Senior Notes receive new secured debt equal to at least 50%of their Senior Notes. While an exchange offer priced at 50% of par value seemsreasonable, it is not a certainty. We can envision scenarios in which the company’sresults deteriorate further and the exchange offer is extended at levels well below50% of par. The company may also choose to exchange the Cash Pay Notes in thenear term and the PIK Toggle Notes after the pay-in-kind period. The price disparitybetween the Cash Pay and PIK Toggle Notes (three or four points) does not, in ourview, fully reflect the possibility that the Cash Pay Notes could be offered an exchangeand the PIK Toggles left unsecured for an extended period. GUC recoveries, in theevent of a financial restructuring of NMG, would likely be de minimis.
The company announced that it has elected to pay-in-kind the interest on the PIKToggle Notes during the interest period commencing 4/15/17. The company willprobably, in our view, elect to pay-in-kind the interest due on the PIK Toggle Notesduring the interest periods commencing 10/15/17 and 4/15/18 as well.
Liquidity Our estimates suggest that the company will have enough liquidity to reach thematurity of its capital structure, which begins in 2020. NMG announced that it had,
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as of 4/1/17, total liquidity of $529.0 million, consisting of cash ($105.8 million) andavailability under its $900 million secured revolving credit ($423.2 million).
Our projections reflect a continuation of recent trends in which the core businessremains under pressure and the online business grows. Our projections also reflect arecovery from NMG One and a normalization of working capital. Our projections donot reflect the benefit of an exchange of the Senior Notes on cash flows.
Net cash flow -$17.4 $5.5 -$11.9 -$50.3 -$64.6 -$75.8Source: Company Reports and Cowen and Company
Strategic Alternatives NMG announced, on 3/14/17, that it has hired financial advisors and is exploringstrategic options, including: the sale of the company or the sale of assets as well asinitiatives to optimize its capital structure.
Acquisition
The WSJ reported concurrently that Hudson’s Bay and NMG have been discussingsome form of business combination. A combination of HBC and NMG probablymakes business sense. A near-term transaction in which HBC buys all of NMGseems, however, unlikely given NMG’s: (1) recent earnings trajectory, (2) already highleverage, and (3) relatively modest and uncertain real estate value.
Earnings Trajectory
The company's Adjusted EBITDA declined $56.2 million, or 31%, between the 4Q15(positive $183.0 million) and 4Q16 (positive $126.8 million).
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Leverage
NMG’s net leverage, at 1/28/17, through its secured and total debt was 6.4x and 9.6x,respectively.
Financing Hurdles
An HBC acquisition of 50% of the voting interests in NMG would not, in our view,constitute a change of control in NMG’s $125 million of 7.125% 1L Secured Notes due6/1/28 (the 7.125s), $960 million of 8.000% Senior Notes due 10/15/21 (the Cash PayNotes) or the $600 million of 8.750%/9.500% PIK Toggle Notes due 10/15/21 (the PIKToggle Notes)(the Cash Pay and PIK Toggle Notes, together the Senior Notes) dueto an exemption for public companies in the definition of Permitted Holders in theindentures that govern the 7.125s and Senior Notes.
But an acquisition of more than 50% of the voting interests in NMG would, constitutea change of control in the credit agreements that govern NMG’s $900 million assetbased revolving credit (the ABL) and $2.854 billion secured term loan (the TL)(together the Credit Facilities). A re-financing of the Credit Facilities would beexpensive, if it could be done at all. The TL trades at a dollar price of 80 and is pricedat L+425 bp (including a 100 bp LIBOR floor). Refinancing the Credit Facilities, andnot the Senior Notes, would likely be problematic as we expect that any new creditfacilities would need to mature inside of the 10/15/21 maturity on the Senior Notes(now trading in the high-50s), which does not provide much run-way for a buyer.
Asset sales
NMG is, based on our read, free to sell the assets in any subsidiaries that arenot restricted under the Credit Agreements or the Indentures (the UnrestrictedSubsidiaries) to a third party and dividend the proceeds to the Sponsors. TheUnrestricted Subsidiaries own some assets with meaningful value, including: (1)MyTheresa and (2) owned properties located in McLean, Virginia, San Antonio, Texasand Longview, Texas (together, the "Properties"). Most of the value in the UnrestrictedSubsidiaries, in our view, are the company’s stake in MyTheresa.
NMG does not break-out the results of MyTheresa, but we believe that the resultsof the company’s subsidiaries that do not guarantee the company Credit Facilitiesand Senior Notes (the Non-Guarantors), which are provided in NMG’s consolidatingstatements, provide a reasonable proxy for the results of MyTheresa. The Non-Guarantors generated revenues and Adjusted EBITDA for the twelve month periodended 1/28/17 of approximately $231.9 million and $15.3 million, respectively. Therevenues of the Non-Guarantors have nearly doubled between the fiscal year ended8/1/15 and the twelve month period ended 1/28/17:
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SG&A $38.5 $58.8 $27.0 $34.0 $65.8Other 7.6 4.8 4.0 -0.7 0.2EBITDA -$8.7 $8.6 $3.9 $10.6 $15.3EBITDA margin -7.1% 4.3% 4.3% 8.8% 6.6%Source: Company Reports and Cowen and Company
The company disclosed that the book value of the Properties was $98 million and thatcompany will lease the Properties from the Unrestricted Subsidiaries for $5 million/year.
Debt Exchange
The credit agreements that govern the company’s secured debt give managementsignificant flexibility to offer the holders of the Senior Notes an exchange into secureddebt. A debt exchange seems likely at some point given that it could, without dilutingthe Sponsors, reduce the company’s overall leverage and cash requirements.
The new debt to be exchanged for Senior Notes could issued by the: (1) RestrictedSubsidiaries pursuant to the carve-outs in the Credit Facilities and/or (2) UnrestrictedSubsidiaries using the assets that are already there (MyTheresa and the Properties)and any additional assets contributed to the Unrestricted Subsidiaries, as collateral. 1LDebt issued at the Restricted Subsidiaries would most likely be parri passu with theexisting 1L Debt whereas debt issued by the Unrestricted Subsidiaries would be seniorto the existing 1L Debt with respect to the value at the Unrestricted Subsidiaries.
Permitted Investments
NMG recently (3/10/17) designated certain of its subsidiaries as UnrestrictedSubsidiaries for purposes of the Senior Notes, presumably to facilitate a debtexchange. The re-designated subsidiaries are the entities through which the Companyconducts the operations of MyTheresa and holds its owned stores located in SanAntonio, TX and McLean, VA and distribution center in Longview, TX (the Properties).
NMG's obligations under the Credit Facilities and Senior Notes are guaranteed by thesame entities, except that the Senior Notes are not guaranteed by Holdings.
It is not clear to us how much incremental flexibility the company has to contributeadditional assets to Unrestricted Subsidiaries. The most restrictive of the PermittedInvestment tests in the company’s capital structure appear to be the Indentures, whichappear to cap Permitted Investments at $250 million, and have, presumably, alreadybeen reduced by the acquisition of MyTheresa and the Properties.
The Properties have a book value of $98 million which may not be far from fair marketvalue given the $5 million/year lease payment. The Permitted Investment test is basedon the fair market value of the Properties.
Although MyTheresa is growing at an impressive rate, the company is still relativelysmall and, in our view, the debt capacity of the Unrestricted Subsidiaries limited.
Credit Facility Carve-Outs
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Although the debt capacity of the Unrestricted Subsidiaries may be limited, we believethat the carve-outs in the company’s credit facilities will be sufficient to complete anexchange for the Senior Notes. We see at least $996 million of carve-outs in the CreditFacilities through which it could issue incremental 1L Debt in an exchange for theSenior Notes.
Credit Facility: $ millions Comments:Original $2,950 -Accordian 650 Non-Ratio Based Incremental Facility CapSubtotal $3,600 -
Outstandings 2,854 As of 4/11/17Capacity $746 -
General basket 250 The greater of $250 million and 2.75% of CTATotal $996 -Source: Company Reports and Cowen and Company
The company can, in addition use availability under its ABL Facility (4/1/17: $423.2million) to repurchase bonds.
Business Description NMG operates under three luxury brands (Neiman Marcus, Bergdorf Goodman,and MyTheresa) and one off-price brand (Last Call). NMG acquired MyTheresa, aluxury retailer based in Munich, Germany that conducts most its business throughthe mytheresa.com website, in October, 2014. NMG paid an estimated $236.0 million,consisting of $181.7 million at closing and an estimated $54.3 million in earn-out payments over two years. Last Call is an off-price fashion brand catering toaspirational, price-sensitive yet fashion-minded customers. NMG operated 85 storesas of 1/28/17, doing business as Neiman Marcus (42 stores), Bergdorf Goodman (2),and Last Call (41).
NMG offers women’s and men’s apparel, handbags, shoes, cosmetics, and preciousand designer jewelry from fashion designers including: Chanel, Prada, Gucci, LouisVuitton, and Van Cleef & Arpels.
NMG’s average customer is female (79%), middle-aged (early 50s), and affluent(household net worth greater than $1 million). The company is, like most retailers,trying to attract younger consumers through omni-channel initiatives, includingMyTheresa.com. NMG generates approximately 30% of its sales online.
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Source: Company Reports and Cowen and Company(a) LTM as of 1/28/17
0%
5%
10%
15%
20%
25%
30%
35%
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
7/30/12
8/3/13
8/2/14
8/1/15
7/30/16
1/28/17(a)
($millions)
Annual Online Revenue
Online Revenue ($) Online Revenue / Total Revenue
NMG was purchased by Ares Management, L.P. and Canada Pension Plan InvestmentBoard (together, the "Sponsors") and certain co-investors from Texas Pacific Group(TPG) and Warburg Pincus on 10/25/13 for $6.168 billion or 9.0x Adjusted EBITDA (theAcquisition). The Sponsors contributed $1.583 billion in the form of cash equity to thetransaction. TPG and Warburg Pincus purchased NMG from its public shareholders inthe 4Q05 for $5.1 billion.
As ofAcquisition Financing ($ millions): 10/25/13$900 million ABL due 7/25/21 $75.0Term Loan due 10/25/20 2,950.08.000% Sr Nts due 10/15/21 960.08.750/9.500% Sr PIK Toggle Nts due10/15/21 600.0Subtotal $4,585.0
Equity investment from Parent 1,583.3Total investment $6,168.3
Adjusted EBITDA (a) $685.1Transaction multiple 9.0xSource: Company Reports and Cowen and Company(a) LTM as of 11/2/13
Macro Headwinds Luxury retailers, despite the financial wherewithal of their customers, are not immuneto the secular trends undermining traditional retailers.
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Source: Company Reports and Cowen and Company
5.4% 5.3%3.6%
5.4% 5.7% 5.5% 5.9% 4.9% 5.5% 5.6%
2.2% 1.9%
-5.6%
-2.4%-5.0%-4.1%
-8.0%-6.8%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
10/27/12
1/26/13
4/27/13
8/3/13
11/2/13
2/1/14
5/3/14
8/2/14
11/1/14
1/31/15
5/2/15
8/1/15
10/31/15
1/30/16
4/30/16
7/30/16
10/29/16
1/28/17
YoyGrowth
Neiman Marcus Quarterly Same Store Sales
Source: Company Reports and Cowen and Company
10.7%
6.3%
2.7%4.4%
0.1%2.6%
3.9% 3.3% 3.9%4.7% 4.4% 4.9%
0.9% 1.0%
-1.7%-1.2%
2.4%
-0.9%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
10/27/12
1/26/13
4/27/13
8/3/13
11/2/13
2/1/14
5/3/14
8/2/14
11/1/14
1/31/15
5/2/15
8/1/15
10/31/15
1/30/16
4/30/16
7/30/16
10/29/16
1/28/17
YoyGrowth
Nordstrom Quarterly Same Store Sales
Source: Company Reports and Cowen and Company
3.7% 3.9% 3.8%
-0.8%
3.5%1.4%
-1.6%
3.4%
-1.4%
2.0%
-0.7%-2.1%
-3.9%-4.8%-6.1%
-2.6%-3.3%-2.7%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
10/27/12
1/26/13
4/27/13
8/3/13
11/2/13
2/1/14
5/3/14
8/2/14
11/1/14
1/31/15
5/2/15
8/1/15
10/31/15
1/30/16
4/30/16
7/30/16
10/29/16
1/28/17
YoyGrowth
Macy's Quarterly Same Store Sales
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Source: Company Reports and Cowen and Company
3.1% 2.6% 2.2%1.0%
2.6%0.6% 0.1%
-3.6%-1.2%
-5.7%
-1.3%
-4.6%
0.1%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
10/27/12
1/26/13
4/27/13
8/3/13
11/2/13
2/1/14
5/3/14
8/2/14
11/1/14
1/31/15
5/2/15
8/1/15
10/31/15
1/30/16
4/30/16
7/30/16
10/29/16
1/28/17
YoyGrowth
Saks Quarterly Same Store Sales
In addition to the SSS decline, NMG’s margins have contracted. NMG’s AdjustedEBITDA, as an example, is down $223.3 million, or 31%, between its most recent peakduring the twelve month period ended 8/1/15 (positive $710.6 million) and the twelvemonth period ended 1/28/17 (positive $487.3 million).
Source: Company Reports and Cowen and Company(a) LTM as of 1/28/17
Management has indicated that, in addition to the aforementioned macro trends,the company’s performance has been negatively impacted by: (1) the weakness ofoil and natural gas prices and (2) the strength of the US$. The company generatesapproximately 50% of its revenues from states where consumer spending isparticularly exposed to the price of oil and the US$.
Seven of the company’s 42 Neiman/Bergdorf Goodman locations are in TX. Thedecline in oil prices from the most recent peak in mid-2014 ($100+/barrel) to currentlevels ($50+/barrel) has had a negative impact on the company’s sales.
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Source: Company Reports and Cowen and Company
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
$100.00
$110.00
1/31/2012
3/30/2012
5/31/2012
7/31/2012
9/28/2012
11/30/2012
1/31/2013
3/29/2013
5/31/2013
7/31/2013
9/30/2013
11/29/2013
1/31/2014
3/31/2014
5/30/2014
7/31/2014
9/30/2014
11/28/2014
1/30/2015
3/31/2015
5/29/2015
7/31/2015
9/30/2015
11/30/2015
1/29/2016
3/31/2016
5/31/2016
7/29/2016
9/30/2016
11/30/2016
1/31/2017
PriceofWTI
Monthly Price of WTI
NMG has seventeen stores in states with cities that host large numbers ofinternational travelers (CA, NY, and FL). The current strength of the US dollar relativeto other major currencies, particularly the GBP, Yuan, BRL, has had a negative impacton tourist spending at NMG locations.
Source: Company Reports and Cowen and Company
¥75.00
¥80.00
¥85.00
¥90.00
¥95.00
¥100.00
¥105.00
¥110.00
¥115.00
¥120.00
¥125.00
1/31/2012
3/30/2012
5/31/2012
7/31/2012
9/28/2012
11/30/2012
1/31/2013
3/29/2013
5/31/2013
7/31/2013
9/30/2013
11/29/2013
1/31/2014
3/31/2014
5/30/2014
7/31/2014
9/30/2014
11/28/2014
1/30/2015
3/31/2015
5/29/2015
7/31/2015
9/30/2015
11/30/2015
1/29/2016
3/31/2016
5/31/2016
7/29/2016
9/30/2016
11/30/2016
1/31/2017
USD/JPY
Monthly USD/JPY Exchange Rate
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Source: Company Reports and Cowen and Company
¥6.00
¥6.10
¥6.20
¥6.30
¥6.40
¥6.50
¥6.60
¥6.70
¥6.80
¥6.90
¥7.00
1/31/2012
3/30/2012
5/31/2012
7/31/2012
9/28/2012
11/30/2012
1/31/2013
3/29/2013
5/31/2013
7/31/2013
9/30/2013
11/29/2013
1/31/2014
3/31/2014
5/30/2014
7/31/2014
9/30/2014
11/28/2014
1/30/2015
3/31/2015
5/29/2015
7/31/2015
9/30/2015
11/30/2015
1/29/2016
3/31/2016
5/31/2016
7/29/2016
9/30/2016
11/30/2016
1/31/2017
USD/CNY
Monthly USD/CNY Exchange Rate
Source: Company Reports and Cowen and Company
$0.70
$0.75
$0.80
$0.85
$0.90
$0.95
$1.00
1/31/2012
3/30/2012
5/31/2012
7/31/2012
9/28/2012
11/30/2012
1/31/2013
3/29/2013
5/31/2013
7/31/2013
9/30/2013
11/29/2013
1/31/2014
3/31/2014
5/30/2014
7/31/2014
9/30/2014
11/28/2014
1/30/2015
3/31/2015
5/29/2015
7/31/2015
9/30/2015
11/30/2015
1/29/2016
3/31/2016
5/31/2016
7/29/2016
9/30/2016
11/30/2016
1/31/2017
USD/EUR
Monthly USD/EUR Exchange Rate
NMG’s financial performance has deteriorated in recent years. That having been said,NMG’s margins are in-line with peers.
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Source: Company Reports, Bloomberg L.P., and Cowen and Company(a) LTM as of 1/28/17
12.7%13.9%
12.6% 12.5%
9.9% 9.4%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
NMG KSS M JWN JCP HBCAdjustedEBITDARMargin
Adjusted EBITDAR Margin (a)
Adjusted EBITDAR Margin Weighted Average
The company’s outlook remains, inour view, mixed
Traffic, even at the best locations, will likely remain constrained as apparel salescontinue to migrate on-line. Store closures, and the resulting inventory liquidations,will probably put further pressure on both traffic and pricing. It is becoming moredifficult for luxury department stores to offer differentiated merchandise as moreluxury vendors adopt direct to consumer strategies. The aging of the baby boomers,the consumers most willing to pay a premium for luxury brands, will continue to weighon the luxury spend.
NMG’s response Management has taken some steps to stabilize the company’s earnings.
NMG One
NMG launched, after three years of development, a new inventory managementsystem (NMG One) in August, 2017. NMG One effectively compressed three distinct40-plus year old legacy operating systems into one, with the goal of reducing overallinventory levels and markdowns. The conversion required the transfer of a significantamount of data as well as the training of personnel. The company experiencedoperational issues which have, according to management, contributed to $55 millionto $60 million of lost revenues year-to-date. Management expects that it will take theremainder of 2017 to work through the remaining issues.
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Appendix 1 - Corporate Structure
Source: Company Reports and Cowen and Company
(a) Entities affiliated with Ares Management, L.P., Canada Pension Plan Investment Board, and Co-Investors
(b) Guarantor of ABL and Term Loan (together the Senior Secured Credit Facilities)
(c ) Guarantor of 7.125s
(d) Co-Isssuer of 8s and PIK Nts
(e ) Current and future wholly owned restricted subsidiaries that guarantee the Senior Secured Credit Facilities also guarantee the 8s and PIK Nts
Sponsors (a)
Neiman Marcus Group, Inc. (f.k.a
NM Mariposa Holdings, Inc.)
("Parent")
Mariposa Intermediate Holdings
LLC ("Holdings")(b)
Neiman Marcus Group LTD LLC
(f.k.a. Neiman Marcus Group LTD
Inc.) (c ) (d)
Mariposa Borrower, Inc. (d)
The Neiman Marcus Group LLC
(f.k.a The Neiman Marcus Group,
Inc.)
Guarantor Subsidiaries (e ) Non-Guarantor Subsidiaries
$900.0 million ABL due 7/25/21
$2,854.3 million Term Loan due 6/1/28
$960.0 million 8.000% Sr Nts due 10/15/21 (the 8s)
$600.0 million 8.750/9.500% Sr PIK Toggle Nts Due 10/15/21 (the PIK Nts)
$125.0 million 7.125% 1L Nts due 6/1/28 (the 7.125s)
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Appendix 2 - NMG Property
Owned:
SF
City State Mall Owner Mall ('000s) Low High Low High Comments:
San Francisco CA - - 252 $900 $1,100 $227 $277 On 11/10/16, Macy's disclosed that it had signed a contract
to sell its 248,000 sf San Francisco location for $250 million
($1,000/sf). The location is within walking distance of the
Neiman property.
McLean VA GGP Tyson's Galleria 130 150 200 20 26 Macy's agreed to sell four stores to GGP for $46 million in
October 2016. Macy's plans to lease back its 265,000
square foot store in the Tyson's Galleria mall and close the
other three stores. The transaction implies a maximum value
of the Tyson's Galleria store, assumign zero value for the
stores to be closed, of $174/square foot.
Plano (Willow Bend) TX Starwood Retail Partners The Shops at Willow Bend 156 150 200 23 31 -
Orlando FL The Forbes Company The Mall at Millenia 95 150 200 14 19 -
San Antonio TX GGP The Shops at La Cantera 120 150 200 18 24 -
Natick MA GGP Natick Mall 103 150 200 15 21 -
Total / Average - - - 856 $371 $465 $317 $398 -
Owned Subject to Partial Ground Lease:
SF
City State Mall Owner Mall ('000s) Low High Low High Comments:
Dallas (Downtown) TX - - 129 $200 $250 $26 $32 -
Beverly Hills CA - - 185 900 1,100 167 204 -
Total / Average - - - 314 $612 $751 $192 $236 -
Owned buildings on leased lands:
SF
City State Mall Owner Mall ('000s) Low High Low High Comments:
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Valuation Methodology And RisksValuation Methodology
Credit & Cross Capital:
Our valuation is based on a number of factors, including but not limited to, anissuer’s underlying business prospects and credit profile as well as current marketconditions. Our view of an issuer’s business outlook includes, but is not limited to:(1) an assessment of relevant industry trends, (2) the issuer’s position within itsindustry and how its position might change over time, (3) management’s strategyand the likelihood that management will be able to execute its strategy. Our viewof the issuer’s credit profile includes, but is not limited to, the issuer’s: (1) overallleverage as well as the composition of its leverage, (2) liquidity and its ability to meetits obligations as they come due, and (3) the value of its assets. Our valuation of aspecific security includes, but is not limited to: (1) the potential recovery in a varietyof scenarios, including financial restructurings, and the probability of each, and (2)its liquidity relative to other securities. Our valuation contemplates a variety of capitalmarket environments.
Investment Risks
Credit & Cross Capital:
Investment risks include, but are not limited to: (1) industry trends, (2) changes in theissuer’s competitive position, (3) management’s strategy and its ability to execute itsstrategy, (4) the issuer’s financial and operational leverage, (5) the issuer’s liquidityversus its cash requirements, (6) changes in the issuer’s ability to access the capitalmarkets, and (7) changes in the liquidity of a particular security.
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AddendumStocks Mentioned In Important Disclosures
Ticker Company Name
NMG Neiman Marcus Group LTD LLC
Analyst CertificationEach author of this research report hereby certifies that (i) the views expressed in the research report accurately reflect his or her personal views about any and all of the subjectsecurities or issuers, and (ii) no part of his or her compensation was, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report.
Important DisclosuresCowen and Company, LLC trades or may trade as principal in the debt securities of Neiman Marcus Group LTD LLC.Cowen and Company, LLC compensates research analysts for activities and services intended to benefit the firm's investor clients. Individual compensation determinations forresearch analysts, including the author(s) of this report, are based on a variety of factors, including the overall profitability of the firm and the total revenue derived from all sources,including revenues from investment banking, sales and trading or principal trading revenues. Cowen and Company, LLC does not compensate research analysts based on specificinvestment banking transactions or specific sales and trading or principal trading revenues.
DisclaimerOur research reports are simultaneously available to all clients are on our client website. Research reports are for our clients only. Not all research reports are disseminated,e-mailed or made available to third-party aggregators. Cowen and Company, LLC is not responsible for the redistribution of research by third party aggregators. Selectedresearch reports are available in printed form in addition to an electronic form. All published research reports can be obtained on the firm’s client website, https://cowenlibrary.bluematrix.com/client/library.jsp.
The information, opinions, estimates and forecasts are as of the date of this report and subject to change without prior notification. We seek to update our research as appropriate,but various regulations may prevent us from doing so. Research reports are published at irregular intervals as appropriate in the analyst’s judgement.
Further information on subject securities may be obtained from our offices. This research report is published solely for information purposes, and is not to be construed as an offerto sell or the solicitation of an offer to buy any security in any state where such an offer or solicitation would be illegal. Other than disclosures relating to Cowen and Company,LLC, the information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purport to be a complete statement or summary of the availabledata. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. The opinions and recommendations herein do not takeinto account individual client circumstances, objectives or needs and are not intended as recommendations of investment strategy. The recipients of this report must make theirown independent decisions regarding any securities subject to this research report. In some cases, securities and other financial instruments may be difficult to value or sell andreliable information about the value or risks related to the security or financial instrument may be difficult to obtain. To the extent that this report discusses any legal proceedingsor issues, it has not been prepared to express or intended to express any legal conclusion, opinion or advice. Our salespeople, traders and other professionals may provide oralor written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed in our research. Our principal trading areaand investing businesses may make investment decisions that are inconsistent with recommendations or views expressed in our research. Cowen and Company, LLC maintainsphysical, electronic and procedural information barriers to address the flow of information between and among departments within Cowen and Company, LLC in order to preventand avoid conflicts of interest with respect to analyst recommendations.For important disclosures regarding the companies that are the subject of this research report, please contact Compliance Department, Cowen and Company, LLC, 599 LexingtonAvenue, 20th Floor, New York, NY 10022. In addition, the same important disclosures, with the exception of the valuation methods and risks, are available on the Firm's disclosurewebsite at https://cowen.bluematrix.com/sellside/Disclosures.action.
Equity Research Price Targets: Cowen and Company, LLC assigns price targets on all companies covered in equity research unless noted otherwise. The equity research pricetarget for an issuer's stock represents the value that the analyst reasonably expects the stock to reach over a performance period of twelve months. Any price targets in equitysecurities in this report should be considered in the context of all prior published Cowen and Company, LLC equity research reports (including the disclosures in any such equityreport or on the Firm's disclosure website), which may or may not include equity research price targets, as well as developments relating to the issuer, its industry and the financialmarkets. For equity research price target valuation methodology and risks associated with the achievement of any given equity research price target, please see the analyst's equityresearch report publishing such targets.
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From time to time “Cowen Credit Research and Trading” research analysts provide investment recommendations on securities that are the subject of this report. Theserecommendations are intended only as of the time and date of publication and only within the parameters specified in each individual report. “Cowen Credit Research and Trading”investment recommendations are made strictly on a case-by-case basis, and no recommendation is provided as part of an overarching rating system or other set of consistentlyapplied benchmarks. The views expressed in this report may differ from the views offered in the firm’s equity research reports prepared for our clients.
Notice to UK Investors: This publication is produced by Cowen and Company, LLC which is regulated in the United States by FINRA. It is to be communicated only to personsof a kind described in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. It must not be further transmitted to any other personwithout our consent.Notice to European Union Investors: Individuals producing recommendations are required to obtain certain licenses by the Financial Regulatory Authority (FINRA). You canreview the author’s current licensing status and history, employment history and, if any, reported regulatory, customer dispute, criminal and other matters via “Brokercheck byFINRA” at http://brokercheck.finra.org/. An individual’s licensing status with FINRA should not be construed as an endorsement by FINRA. General biographical information is alsoavailable for each Research Analyst at www.cowen.com.
Additionally, the complete preceding 12-month recommendations history related to recommendation in this research report is available at https://cowen.bluematrix.com/sellside/Disclosures.action
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COWEN AND COMPANY EQUITY RESEARCH RATING DEFINITIONS
Outperform (1): The stock is expected to achieve a total positive return of at least 15% over the next 12 months
Market Perform (2): The stock is expected to have a total return that falls between the parameters of an Outperform and Underperform over the next 12 months
Underperform (3): Stock is expected to achieve a total negative return of at least 10% over the next 12 months
Assumption: The expected total return calculation includes anticipated dividend yield
Cowen and Company Equity Research Rating DistributionDistribution of Ratings/Investment Banking Services (IB) as of 03/31/17
Rating Count Ratings Distribution Count IB Services/Past 12 Months
Buy (a) 441 58.57% 86 19.50%
Hold (b) 303 40.24% 14 4.62%
Sell (c) 9 1.20% 0 0.00%
(a) Corresponds to "Outperform" rated stocks as defined in Cowen and Company, LLC's equity research rating definitions. (b) Corresponds to "Market Perform" as defined in Cowenand Company, LLC's equity research ratings definitions. (c) Corresponds to "Underperform" as defined in Cowen and Company, LLC's equity research ratings definitions. Cowenand Company Equity Research Rating Distribution Table does not include any company for which the equity research rating is currently suspended or any debt security followed byCowen Credit Research and Trading.
Note: "Buy", "Hold" and "Sell" are not terms that Cowen and Company, LLC uses in its ratings system and should not be construed as investment options. Rather, these ratingsterms are used illustratively to comply with FINRA regulation.
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