-- U.S. luxury department store The Neiman Marcus Group Inc. is issuing a
$500 million senior secured incremental term loan.
-- We are lowering the issue-level rating on the senior secured term loan
to 'B+' from 'BB-' and revising the recovery rating to '3' from '2'.
-- At the same time, we are affirming all other ratings on the company,
including our 'B+' corporate credit rating.
-- The stable outlook reflects our view that further strength in luxury
retailing is likely to propel modest performance gains over the next year.
On Nov. 20, 2012, Standard & Poor's Ratings Services lowered its issue-level
rating on The Neiman Marcus Group Inc.'s senior secured term loan to 'B+'
from 'BB-' and revised the recovery rating to '3' from '2', indicating our
expectation of meaningful (50% to 70%) recovery in the event of payment
default. At the same time, we affirmed all other ratings, including the 'B+'
corporate credit rating, on the company. Neiman Marcus plans to use the
proceeds from the $500 million incremental term loan to repay its senior
The ratings on Dallas-based luxury retailer Neiman Marcus incorporate Standard
& Poor's Ratings Services' assessment of a "fair" business risk profile and a
"highly leveraged" financial risk profile. The company's business risk profile
reflects its participation in the highly competitive department store sector,
relatively narrow market compared with other department store operators, and
small store base. Its solid position in the high-service, luxury merchandise
specialty department store industry, strong vendor relationships, and improved
operating performance over the past year somewhat offset these risks. In our
view, Neiman Marcus has done a good job maintaining its customer service,
reputation, and merchandise.
The company ended another strong year with sales increasing 8.6%, primarily
because of comparable sales of 7.9%. Margins strengthened to 14.4% on July 28,
2012, compared with 14.1% for the prior period because of solid full-priced
selling. We expect revenue growth over the next year to be consistent with
prior trends, but investments in infrastructure and technology to pressure
margins slightly. Specifically, our assumptions over the next year include:
-- Sales per square foot to increase in the mid-single digits.
-- Total square feet to remain relatively flat.
-- Direct marketing to increase in the low-double digits.
-- Margins to demonstrate slight erosion over the next 12 months, based
on continued investment in infrastructure and technology initiatives.
-- Inventory growth in line with revenue increases.
We assess the company's financial profile as highly leveraged and expect this
to continue, so long as the company is owned by private equity. We believe
that the company's very aggressive financial policies and the potential for
additional dividends are likely to negate any sustained, meaningful
improvement in credit protection metrics. We expect mid-single-digit growth in
EBITDA over the next year to lower leverage to the low-5x area from 5.5x on
July 28, 2012. We believe that interest coverage will increase to the low-3x
range from 2.9x and funds from operations (FFO) to total debt is likely to
remain in the low-double digits.
We assess Neiman Marcus' liquidity as "adequate," as we expect cash sources to
exceed cash needs by at least 1.2x. The company's cash position declined
meaningfully year-over-year to $49.3 million on July 28, 2012, from $321.6
million partly to fund the dividend payment of $449 million. We believe the
company will use free operating cash flow of about $165 million over the next
year to increase its cash on hand and repay a portion of the $100 million
outstanding under its revolving credit facility. In our view, cash uses
include about $180 million for capital expenditures and some modest investment
in working capital.
Other relevant aspects include:
-- We estimate coverage of sources over uses will be above 1.2x.
-- Net sources would be positive, even with a 15% decline in EBITDA.
-- Neiman Marcus has sound relationships with its banks.
-- There are no meaningful debt maturities over the next few years.
We rate the company's secured debt 'B+' with a recovery rating of '3',
indicating our expectation of meaningful (50% to 70%) recovery for lenders in
the event of a default. We rate the company's unsecured debt 'B-' with a
recovery rating of '6', indicating our expectation of negligible (0% to 10%)
recovery for lenders in the event of a default. For the complete recovery
analysis, see Standard & Poor's recovery report on Neiman Marcus, published
shortly after this report on RatingsDirect.
Our stable rating outlook on Neiman Marcus reflects our expectation that
performance gains will continue over the next year, with EBITDA growth in the
mid-single digits. We expect further strength in luxury retailing to propel
revenue gains in the upper-single digits, but margins to erode slightly
because of investments in infrastructure and technology initiatives. In our
view, the company's aggressive financial policies will negate any meaningful
improvements in credit protection metrics over the long term. However, there
could be some modest strengthening of metrics over the next year.
Although unlikely over the next 12 months, we could raise our rating on the
company if revenues rise in the upper-single digits and margins increase by
over 75 basis points. Concurrently, the company would significantly moderate
its future dividend policies. Under this scenario, leverage would be in the
upper-4x area and interest coverage would be in the mid-3x area.
We could lower the rating if performance slows substantially because of an
unexpected drop in luxury retail spending or if the company increases the
amount of future dividends and issues debt to fund them. Under this scenario,
the company would issue debt above $600 million and use the proceeds to pay a
dividend, leading to leverage of about 6x.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Our Rating Process, April 15, 2008
-- 2008 Corporate Ratings Criteria: Ratios And Adjustments, April 15, 2008
Ratings Affirmed; Recovery Rating Unchanged
The Neiman Marcus Group Inc.
Corporate Credit Rating B+/Stable/--
Recovery Rating 6
Downgraded; Recovery Rating Revised
The Neiman Marcus Group Inc.
Senior Secured B+ BB-
Recovery Rating 3 2
The Neiman Marcus Group Inc.
US$500 mil incremental term bank ln B+
Recovery Rating 3