According to a recent filing of Longleaf Funds, the fund has bought junk bonds in Neiman Marcus. Since they are Rule 144 (meaning only institutions can buy them), we will focus on another series. Neiman is owned by the private equity fund Ares and by the Canadian Pension Fund.
I found these notes while perusing Longleaf Funds Quarterly holdings at the Securities and Exchange Commission. Longleaf owns: Neiman Marcus Group LTD LLC 8.00% 144A Senior Notes due Oct.15, 2021. I also see a series due June 1, 2028 with a cusip of 640204ab9. The bonds yield almost 8% and have a coupon of 7.125. Standard & Poor has them rated as B-. The bonds trade at around 92. Back in 2009, they fell to 30.
Looking at the 10K filed with the SEC, the company owns 856,000 square feet of stores and 1.330 million square feet of distribution centers. The company operates 42 stores under the Neiman Marcus and Bergdorf Goodman names. Without doing a lot of research, I would guess the stores and warehouses are worth many hundreds of millions of dollars.
The company sells high-end clothing, jewelry, etc.: David Yurman, Gucci, Prada, Burberry, Hermes, Tom Ford, Zegna and so on. I would guess that like many retailers, Neiman faces competition from the internet. Also as one might expect, its success is tied to the economy. .
Sales in the fiscal year ending July 31 were $4.949 billion, cost of goods sold was $3.22 billion, sales, general and administrative, were $1.118 billion. There was a net loss of $406.1 million. Sales were down slightly from the previous year. Earnings were $14.9 million last fiscal year.
Neiman has a lot of debt. Cash is $61.8 million and what I assume are accounts receivables are $146.9 million. Accounts payables are $317.7 million and $4.584 billion in debt. Yikes! Cash flows from operations were $310.6 million and capital expenditures were $301.5 million. So free cash flow was $9.1 million. It takes a lot of investment to keep the stores looking trendy.
The bonds are debentures, meaning that they are junior to just about everything else. According to the prospectus, there is a $1.875 senior term, then an asset backed loan, $700 million in senior bonds (which I assume is the Rule 144 owned by Longleaf), $500 million in senior subordinated and the $125 million in debentures that are being discussed. The prospectus is from 2006, so a lot has happened since then.
This is the problem with bond investing. What the general public gets is the unsecured stuff. This is available to financial advisors. One cannot buy Rule 144 unless they are an institution or a wealthy person.
Like a lot of retailers, Neiman faces competition from eBay (EBAY, Financial), Amazon (AMZN, Financial) and other retailers. I am leery of buying retailers. It seems the economy is going through a renaissance and retail is getting beaten up.
I would not buy the bonds at this price. However, I might be tempted if they fell in value. I do not like that they are junior debentures, but you have to think that Ares and the Canadian Pension Fund would step in if the debt load gets to be too much or the economy turns.
Disclosure: We do not own the bonds.
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