Document
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
Form 10-K
(Mark One)
 
ý           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the fiscal year ended July 29, 2017
 
OR
 
¨             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                  to
 
Commission file no. 333-133184-12
Neiman Marcus Group LTD LLC
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
20-3509435
(I.R.S. Employer
Identification No.)
 
 
1618 Main Street
Dallas, Texas
(Address of principal executive offices)
75201
(Zip code)
Registrant’s telephone number, including area code: (214) 743-7600
 
 
 
Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨  No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ý  No ¨
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ¨  No ý
(Note: The registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. Although not subject to these filing requirements, the registrant has filed all reports that would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months had the registrant been subject to such requirements.)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
 
Accelerated filer ¨
Non-accelerated filer x
(Do not check if a smaller reporting company)

 
Smaller reporting company ¨
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ¨  No ý
The registrant is privately held. There is no trading in the registrant's membership units and therefore an aggregate market value based on the registrant's membership units is not determinable.
 
 
 
 
 


Table of Contents

NEIMAN MARCUS GROUP LTD LLC
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JULY 29, 2017
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
 
 
 
 


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SPECIAL NOTE REGARDING FORWARDLOOKING STATEMENTS
This Annual Report on Form 10-K, including the sections entitled “Business” in Item 1, “Risk Factors” in Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward‑looking statements. In many cases, forward‑looking statements can generally be identified by the use of forward‑looking terminology such as “may,” “plan,” “predict,” “expect,” “estimate,” “intend,” “would,” “will,” “could,” “should,” “anticipate,” “believe,” “project” or “continue” or the negative thereof or other similar expressions.
The forward‑looking statements contained in this Annual Report on Form 10-K reflect our views as of the date of this Annual Report on Form 10-K and are based on our expectations and beliefs concerning future events, as well as currently available data as of the date of this Annual Report on Form 10-K. While we believe there is a reasonable basis for our forward‑looking statements, they involve a number of risks, uncertainties, assumptions and changes in circumstances that may cause our actual results, performance or achievements to differ significantly from those expressed or implied in any forward‑looking statement. Therefore, these statements are not guarantees of future events, results, performance or achievements and you should not rely on them. A variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in our forward‑looking statements, including those factors described in “Risk Factors” in Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7. Factors that could cause our actual results to differ from our expectations include, but are not limited to:
our ability to maintain a relevant, enjoyable and reliable omni-channel experience and to anticipate and meet our customers' evolving shopping preferences, the failure of which could adversely affect our financial performance and brand image;
economic conditions that negatively impact consumer spending and demand for our merchandise;
the highly competitive nature of the luxury retail industry;
our ability to anticipate, identify and respond effectively to changing fashion trends and to accurately forecast merchandise demand, the failure of which could adversely affect our business, financial condition and results of operations;
our ability to anticipate, identify and address risks related to the complexity of our omni‑channel plans, the failure of which could adversely affect our revenues or margins as well as damage our reputation, brands and competitive position;
the success of our advertising and marketing programs;
our ability to drive customer traffic to our retail stores and the success of the expansion, growth and remodel of our retail stores, which are subject to numerous risks, some of which are beyond our control;
costs associated with our expansion and growth strategies, which could adversely affect our performance and results of operations;
the significance of the portion of our revenues from our stores in four states, which exposes us to economic circumstances and catastrophic occurrences unique to those states, such as the impact of fluctuations in the global price of crude oil in our Texas markets;
our dependence on our relationships with certain designers, vendors and other sources of merchandise as they relate to, among other things: (i) the manner in which goods are available to us, (ii) the levels of merchandise made available to us and (iii) the pricing and payment terms with respect to our purchases;
a material disruption in our information systems, delays or difficulties in implementing or integrating new systems or enhancing or expanding current systems, or our failure to achieve the anticipated benefits of any new or updated information systems, which could adversely affect our business or results of operations;
our dependence on positive perceptions of our company, which, if eroded, could adversely affect our customer, employee and vendor relationships;
a breach in information privacy, which could negatively impact our operations;
inflation and foreign currency fluctuations, primarily fluctuations in the U.S. dollar against the Euro and British pound, which could adversely affect our results of operations;
the loss of, or disruption in, one or more of our distribution facilities, which could adversely affect our business and operations;

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our substantial indebtedness, which could adversely affect our business, financial condition, results of operations, credit ratings and ability to obtain additional debt financing, and our ability to fulfill our obligations with respect to such indebtedness;
the restrictions in our debt agreements that may limit our flexibility in operating our business and our ability to pursue future strategic investments and initiatives;
our failure to comply with, or developments in, laws, rules or regulations, which could affect our business or results of operations; and
other risks, uncertainties and factors set forth in this Annual Report on Form 10-K, including those set forth under “Risk Factors” in Item 1A.
    
The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. Each of the forward‑looking statements contained in this Annual Report on Form 10-K speaks only as of the date of this Annual Report on Form 10-K. Except to the extent required by law, we undertake no obligation to update or revise (publicly or otherwise) any forward‑looking statements to reflect subsequent events, new information or future circumstances.


PART I 


ITEM 1.     BUSINESS
 
Our Company
 
Founded over 100 years ago, we are one of the largest omni-channel luxury fashion retailers in the world, with approximately $4.7 billion in revenues for fiscal year 2017, of which approximately 31% were transacted online. Our Neiman Marcus, Bergdorf Goodman and MyTheresa brands represent fashion, luxury and style to our customers. We offer a distinctive selection of women’s and men’s apparel, handbags, shoes, cosmetics and precious and designer jewelry from premier luxury and fashion designers to our loyal and affluent customers “anytime, anywhere, any device.” We have a longstanding heritage of providing the highest level of personalized, concierge-style service to our customers through our experienced team of sales associates.

Under each of our primary brands, we offer our customers a curated and compelling assortment of narrowly distributed merchandise from luxury and fashion designers, including Chanel, Gucci, Brunello Cucinelli, Tom Ford, Christian Louboutin, Valentino, Saint Laurent, Prada, Akris, David Yurman, Ermenegildo Zegna, Loro Piana, Brioni, Louis Vuitton, Goyard and Van Cleef & Arpels. We believe we are the retail partner of choice to luxury designers because we offer distinctive distribution channels that access our loyal and affluent customers and adhere to strict presentation, marketing and promotional standards consistent with the luxury experience. We also have a long history of identifying, partnering with and nurturing emerging designers with the potential for rapid growth. The combined offering from established and emerging designers ensures our merchandise assortment remains unique, compelling and relevant as fashion trends evolve.

As a leader in omni-channel retailing, we provide our customers a deep assortment of luxury merchandise and a consistent, seamless shopping experience, whether our customers shop in our stores, on our websites or via e-mail, text or phone communications with our sales associates. Our comprehensive digital platform integrates and personalizes the online and in-store experience. We empower our sales associates with mobile devices and proprietary technology to improve their connection with our customers and we utilize advanced analytics to personalize merchandise presentations to our customers when they shop online. We believe that a significant portion of the total luxury spending of our customers is digitally influenced via purchases researched and/or transacted online.

We engage our customers primarily through three brands:

Neiman Marcus. Our Neiman Marcus brand caters to affluent luxury customers. We operate 42 full‑line stores in marquee retail locations in major U.S. markets. Our stores are designed to provide a modern, luxurious ambiance by blending art, architecture and technology. In addition, we provide our customers access to our Neiman Marcus brand through our online platform, neimanmarcus.com, and our mobile app.


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Bergdorf Goodman. Our Bergdorf Goodman brand caters to the most discerning luxury clientele. We operate two full‑line stores that feature elegant shopping environments in landmark locations on Fifth Avenue in New York City and through our Bergdorf Goodman online platform, bergdorfgoodman.com.

MyTheresa. Our MyTheresa brand appeals to younger, fashion‑forward, luxury customers, primarily from Europe, Asia and the Middle East. We operate mytheresa.com, our mobile app and the THERESA flagship store in Munich, Germany.

We conduct our specialty retail stores and online operations on an omni-channel basis. As our store and online operations have similar economic characteristics, products, services and customers, our operations constitute a single omni-channel reportable segment.

The Acquisition

On October 25, 2013, the Company merged with and into Mariposa Merger Sub LLC ("Mariposa") pursuant to an Agreement and Plan of Merger, dated September 9, 2013, by and among Neiman Marcus Group, Inc. ("Parent"), Mariposa and the Company, with the Company surviving the merger (the "Acquisition"). As a result of the Acquisition and the Conversion (as defined below), the Company is now a direct subsidiary of Mariposa Intermediate Holdings LLC ("Holdings"), which in turn is a direct subsidiary of Parent. Parent is owned by entities affiliated with Ares Management, L.P. and Canada Pension Plan Investment Board (together, the "Sponsors") and certain co-investors. Previously, the Company was a subsidiary of Newton Holding, LLC, which was controlled by investment funds affiliated with TPG Global, LLC (collectively with its affiliates, "TPG") and Warburg Pincus LLC (together with TPG, the "Former Sponsors"). On October 28, 2013, the Company and NMG (as defined below) each converted from a Delaware corporation to a Delaware limited liability company (the "Conversion"). References made to "we," "our" and "us" are used to refer to the Company and its subsidiaries, as appropriate to the context.

The Company's operations are conducted through its direct wholly owned subsidiary, The Neiman Marcus Group LLC ("NMG").

Certain financial information of the Company and its subsidiaries is presented on a consolidated basis and is presented as "Predecessor" or "Successor" to indicate whether it relates to the period preceding the Acquisition or the period succeeding the Acquisition, respectively. The Acquisition and the allocation of the purchase price were recorded for accounting purposes as of November 2, 2013, the end of our first quarter of fiscal year 2014. In connection with the Acquisition, the Company incurred substantial new indebtedness, in part in replacement of former indebtedness. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." In addition, the purchase price paid in connection with the Acquisition was allocated to state the acquired assets and liabilities at fair value. The purchase accounting adjustments increased the carrying value of our property and equipment and inventory, revalued our intangible assets related to our tradenames, customer lists and favorable lease commitments and revalued our long-term benefit plan obligations, among other things. As a result, the Successor financial information subsequent to the Acquisition is not necessarily comparable to the Predecessor financial information.

Our fiscal year ends on the Saturday closest to July 31.  Like many other retailers, we follow a 4-5-4 reporting calendar, which means that each fiscal quarter consists of thirteen weeks divided into periods of four weeks, five weeks and four weeks.  All references to (i) fiscal year 2017 relate to the fifty-two weeks ended July 29, 2017, (ii) fiscal year 2016 relate to the fifty-two weeks ended July 30, 2016 and (iii) fiscal year 2015 relate to the fifty-two weeks ended August 1, 2015. References to fiscal year 2014 and years preceding and fiscal year 2018 and years thereafter relate to our fiscal years for such periods.

Certain amounts presented in tables are subject to rounding adjustments and, as a result, the totals in such tables may not sum.

Our Customers

Our customers are educated, affluent and digitally connected. With respect to our U.S. operations, the average age of our customers is 51 and approximately 60% of our customers are 54 or younger. Approximately 79% of our customers are female, approximately 46% of our customers have an annual household income over $150,000 and approximately 30% of our customers have a household net worth greater than $1 million. Our customers are active on social media, and we engage them through an active presence on Facebook, Twitter, Instagram and Pinterest, our primary social media platforms.


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Our InCircle loyalty program is designed to cultivate long‑term relationships with our U.S. customers. This program includes marketing features, such as private in‑store events, as well as the ability to accumulate points for qualifying purchases. Almost 40% of our total U.S. revenues in fiscal year 2017 were generated by our InCircle loyalty program members who achieved reward status. On a per customer basis, these customers spend approximately 11 times more with us than our other customers.

Our Brands
We operate three primary luxury brands—Neiman Marcus, Bergdorf Goodman and MyTheresa—which offer the highest level of personalized, concierge-style service and a distinctive selection of women’s and men’s apparel, handbags, shoes, cosmetics and precious and designer jewelry from premier luxury and fashion designers to our loyal and affluent customers “anytime, anywhere, any device.” Our luxury brands comprise a unique, omni-channel retailing model that enables us to leverage our relationships with luxury and fashion designers within each brand to optimize our merchandise allocations and assortments and to expand our customer base and brand awareness by exposing customers of each brand to our other brands through our online platforms and our multi‑brand InCircle loyalty program.
We also operate Last Call, an off-price fashion brand catering to aspirational, price-sensitive yet fashion-minded customers, and Horchow, a luxury home furnishings and accessories brand. Our Last Call brand sources end-of-season and post-season clearance merchandise from our Neiman Marcus and Bergdorf Goodman brands and purchases other off-price merchandise directly from designers for resale, which enables us to effectively manage our inventory while expanding our brand awareness to aspirational, price‑sensitive customers. Our Horchow brand also enhances our brand awareness to purchasers of luxury home furnishings and accessories who may not otherwise be customers of our luxury fashion retail brands.
Neiman Marcus. Neiman Marcus offers distinctive luxury merchandise, including women’s couture and designer apparel, contemporary sportswear, handbags, shoes, cosmetics, men’s clothing and accessories, precious and designer jewelry, decorative home accessories, fine china, crystal and silver, children’s apparel and gift items. Our customers access our Neiman Marcus brand and purchase merchandise through our 42 full-line Neiman Marcus stores located in 18 states and the District of Columbia, our print catalogs, our online platform, neimanmarcus.com, and our mobile app.
Our Neiman Marcus stores are located in marquee retail locations in major metropolitan markets across the United States and are organized as a collection of designer boutiques for established and emerging luxury and fashion designers, each of which is carefully curated by our Neiman Marcus merchandising team. Our Neiman Marcus stores are designed to provide a modern, luxurious ambiance by blending art, architecture and technology. We deliver exceptional customer service and a premier shopping experience through our knowledgeable, professional and well-trained sales associates, our loyalty program and our in‑store dining experiences.
Our Neiman Marcus online platform and mobile app are organized by both product category and designer, and are curated to provide a highly personalized, boutique-like experience for our online customers by offering a wide selection of merchandise and around-the-clock customer assistance. Our web pages adjust to our customers’ preferences based on their prior visits and purchases, allowing customers to select their favorite items, see items new to the site since their last visit and request to be informed of new merchandise or events at their local Neiman Marcus store. Our “Product Configurator” allows customers to customize select items, including shoes and boots, with special colors, fabrics and monograms. Our personalization expertise extends beyond our online platform to our customers through advanced digital e-mail and advertising programs.
Bergdorf Goodman. Bergdorf Goodman is a premier retailer in New York City known for its high-luxury merchandise, which includes women’s couture and designer apparel, contemporary sportswear, handbags, shoes, cosmetics, men’s clothing and accessories, precious and designer jewelry, decorative home accessories, fine china, crystal and silver, children’s apparel and gift items. Our customers access our Bergdorf Goodman brand and purchase merchandise through our two Bergdorf Goodman stores, our print catalogs and our Bergdorf Goodman online platform, bergdorfgoodman.com.
Our two Bergdorf Goodman stores are landmark locations on iconic Fifth Avenue in New York City. The elegant, meticulously designed and decorated and visually stunning stores are tourist attractions and have been featured in numerous films and television shows. Like Neiman Marcus, they feature a collection of designer boutiques for established and emerging luxury and fashion designers, each of which is carefully curated by our Bergdorf Goodman merchandising team to include our narrowly distributed, highly differentiated and distinctive luxury merchandise. Bergdorf Goodman stores feature the same level of dedication to exceptional customer service as Neiman Marcus and often showcase innovative new customer service and marketing strategies, including promotional local same-day delivery and online social initiatives.

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Our Bergdorf Goodman online platform, like Neiman Marcus, is organized by both product category and designer, and is curated to provide a boutique-like experience for our customers by offering personalized presentation of a wide selection of merchandise and around-the-clock customer assistance.
MyTheresa. In October 2014, we acquired MyTheresa, a luxury retailer headquartered in Munich, Germany. MyTheresa offers an assortment of merchandise focused on luxury, first-season fashion curated by the MyTheresa merchandising team. Customers access our MyTheresa brand through mytheresa.com, our mobile app and the THERESA flagship store in Munich, Germany. Our MyTheresa online platform offers a unique combination of editorial content on the latest trends and a broad offering of merchandise.
Last Call. Last Call is an off-price fashion goods retailer. Our customers purchase merchandise through our 38 Last Call stores and our online platform, lastcall.com. Merchandise offered under our Last Call brand includes, among other things, end-of-season and post-season clearance goods sourced directly from our Neiman Marcus and Bergdorf Goodman brands or other off-price merchandise purchased from designers for resale. During fiscal year 2017, we began a process to assess our Last Call footprint and closed four of our Last Call stores. On September 12, 2017, we announced that we will be closing ten additional Last Call stores in fiscal year 2018 in order to optimize our Last Call store portfolio. We will continue to evaluate our off-price business and seek to optimize the operations of Last Call in the future.
Horchow. We also operate the Horchow brand, which offers luxury home furnishings and accessories primarily through horchow.com and print catalogs.
Customer Service and Marketing
We have a longstanding heritage of providing the highest level of personalized, concierge-style service to our customers through our experienced team of sales associates and personal stylists. We believe our superior customer service enables us to cultivate long-term customer relationships and build strong loyalty to our brands. We are committed to providing our customers with a premier shopping experience at all of our brands, whether in-store or through our online platforms, through the following elements of our comprehensive customer service model:
 
omni-channel marketing programs designed to promote customer awareness of our offerings of the latest fashion trends and services;
our InCircle loyalty program designed to cultivate long-term relationships with our customers;
our proprietary credit card program facilitating the extension of credit to our customers;
knowledgeable, professional and well-trained sales associates; and
customer-friendly websites.

We believe we offer our customers fair return policies consistent with the practices of other luxury and specialty retailers and generally more favorable than designer-owned boutiques and websites. We believe these policies help to cultivate long-term relationships with our customers.
 
Marketing Programs.  We conduct a wide variety of omni-channel marketing programs that allow us to engage with our customers in multiple ways. We use our marketing programs to develop and maintain relationships with customers, communicate fashion trends and information and generate excitement about the designer brands we carry. The programs include in-store and online events, social promotions and targeted communications leveraging digital and traditional media.
 
We maintain an active calendar of events to promote our marketing programs. The events, many of which are connected to our InCircle loyalty program, include integrated in-store and online promotions of the merchandise of selected designers or merchandise categories. We also hold seasonal in-store and online trunk shows by leading designers featuring the newest fashions from the designer and participate in charitable functions and partnerships in each of our markets. Trunk shows and in-store promotions at our Neiman Marcus and Bergdorf Goodman stores feature a variety of national and international designers such as Chanel, Brunello Cucinelli, Tom Ford, David Yurman and Ermenegildo Zegna.
 
We maintain a social media presence for Neiman Marcus, Bergdorf Goodman and MyTheresa on blogs, Twitter, Instagram, Pinterest, Facebook and Snapchat. Social content includes insider fashion news, designer profiles, product promotion, customer service and event support. Posts and replies to customers are updated multiple times per day. Each platform is designed to reinforce our position as a fashion leader as well as to highlight the expertise and insider knowledge of our fashion directors and merchants.

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Through our print media programs, we mail various publications to our customers communicating upcoming in-store events, new merchandise offerings and fashion trends. In connection with these programs, Neiman Marcus produces The Book approximately six to eight times each year. The Book is a high-quality shoppable magazine featuring the latest fashion trends that is mailed on a targeted basis to our customers. We also mail an annual Christmas Book known for both practical and lavish gift ideas as well as our over-the-top Fantasy Gifts that can only be found at Neiman Marcus. Our other print publications include the Bergdorf Goodman Magazine, the MyTheresa magazine, specialty catalogs and specific designer mailers.
 
In addition to print publications, we leverage our websites and online advertising through banner ads and paid searches to communicate and connect with customers seeking fashion information and products online. We believe that our online and print catalog operations complement our full-line retail stores and enable our customers to choose the channel that best fits their needs at any given time.
 
InCircle Loyalty Program.  Our InCircle loyalty program is designed to cultivate long-term relationships with our U.S. customers. Our loyalty program focuses on our most active customers and includes marketing features such as private in-store events and the ability to accumulate points for qualifying purchases. Increased points are periodically offered in connection with promotional and other events. Upon attaining specified point levels, points are automatically redeemed for gift cards. Almost 40% of our total U.S. revenues in fiscal year 2017 were generated by our InCircle loyalty program members who achieved reward status. On a per customer basis, these customers spend approximately 11 times more with us than our other customers.
 
Proprietary Credit Card Program.  We maintain a proprietary credit card program in the U.S. through which credit is extended to customers and have a related marketing and servicing alliance with affiliates of Capital One Financial Corporation ("Capital One"). Historically, our customers holding a proprietary credit card, all of whom are members of our InCircle loyalty program, have tended to shop more frequently and have a higher level of spending than customers paying with cash or third party credit cards. In fiscal years 2017 and 2016, approximately 42% of our U.S. revenues were transacted through our proprietary credit cards. We utilize data collected through our proprietary credit card program in connection with promotional events and customer relationship programs to target specific customers based upon their past spending patterns for certain designers, merchandise categories and store locations.

Pursuant to our agreement with Capital One (the "Program Agreement"), Capital One currently offers credit cards and non-card payment plans under both the "Neiman Marcus" and "Bergdorf Goodman" brand names. We receive payments from Capital One based on sales transacted on our proprietary credit cards. These payments are based on the profitability of the credit card portfolio as determined under the Program Agreement and are impacted by a number of factors including credit losses incurred and our allocable share of the profits generated by the credit card portfolio, which in turn may be impacted by credit ratings as determined by various rating agencies. These factors are more fully described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Key Factors Affecting Our Results—Income From Credit Card Program." In addition, we receive payments from Capital One for marketing and servicing activities we provide to Capital One.
 
In connection with the Program Agreement, we have changed and may continue to change the terms of credit offered to our customers. In addition, Capital One has discretion over certain policies and arrangements with credit card customers and may change these policies and arrangements in ways that affect our relationships with these customers. The Program Agreement terminates July 2020 (renewable thereafter for three-year terms), subject to early termination provisions.
 
Sales Associates.  Our sales associates instill and reinforce a culture of relationship-based service valued by our customers. We compensate our sales associates primarily on a commission basis and provide them with training in the areas of customer service, selling skills and product knowledge. Our sales associates participate in active clienteling programs, utilizing both print and digital media, designed to maintain contact with our customers between store visits and to provide personalized updates on the latest merchandise offerings and fashion trends. We empower our sales associates to act as personal shoppers and, in many cases, as the personal style advisor to our customers. In our online operations, customers may interact with knowledgeable sales associates using online chat capabilities offered on our websites or by dialing a toll-free telephone number.

We have equipped our sales force with smartphones enabled with our proprietary mobile technology, which has enabled our sales associates to strengthen relationships with our customers through text messages and e-mails. The mobile apps available to our sales associates include our business dashboard, which shows a customer’s purchase history across channels, the customer’s alteration details and other service details. The sales associate is also given product recommendations and reasons to contact customers for events or offers.

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Our sales associates are experienced. Sales associates who have been with us for longer than one year have an average tenure of approximately ten years and had a turnover rate in fiscal year 2017 of 26%. These tenured associates are highly productive, with more than 40% of them generating over $750,000 of revenues each in fiscal year 2017.
Customer-Friendly Online Platforms.  We believe that we offer a high level of service to customers shopping online through user-friendly smartphone apps and websites, site speeds and functionality and many features such as personalized recommendations, runway videos of apparel, detailed product descriptions, sizing information, interviews with designers and multiple angle shots of merchandise. In addition, we place high importance on quick, accurate product delivery and offer customers a variety of options to take delivery of their purchases and make returns, including free shipping and returns, same-day delivery and buy online and pick up in store. We also offer customers an efficient and friendly call center.

Merchandise
 
We carry a broad selection of narrowly distributed, highly differentiated and distinctive luxury merchandise carefully curated by our highly skilled merchandising groups. We believe our merchandising experience and in‑depth knowledge of our customers and the markets within which we operate allow us to select an appropriate merchandise assortment that is tailored to fully address our customers’ lifestyle needs.
Our experienced merchandising personnel determine the merchandise assortment and quantities to be purchased for each of our brands and the allocation of merchandise to each store. Our merchant and planning organizations for Neiman Marcus stores and Neiman Marcus online are combined to create an omni-channel team and align inventory in stores and online to deliver a superior shopping experience to our customers. As of October 3, 2017, we had approximately 400 merchandise buyers and merchandise planners.

Our percentages of revenues by major merchandise category for fiscal years 2017, 2016 and 2015 were as follows:
 
 
Fiscal year ended
 
 
July 29,
2017
 
July 30,
2016
 
August 1,
2015
 
 
 
 
 
 
 
Women’s Apparel
 
32
%
 
32
%
 
32
%
Women’s Shoes, Handbags and Accessories
 
29

 
28

 
28

Men’s Apparel and Shoes
 
12

 
12

 
12

Cosmetics and Fragrances
 
12

 
11

 
11

Designer and Precious Jewelry
 
9

 
10

 
10

Home Furnishings and Decor
 
5

 
5

 
5

Other
 
1

 
2

 
2

 
 
100
%
 
100
%
 
100
%

Substantially all of our merchandise is delivered to us by our designers as finished goods and is manufactured in numerous locations, including Europe and the United States and, to a lesser extent, China, Mexico and South America.

Our major merchandise categories are as follows:
 
Women’s Apparel.  Women’s apparel consists of dresses, eveningwear, suits, coats and sportswear separates—skirts, pants, blouses, jackets and sweaters. We work with women’s apparel designers to present the merchandise and highlight the best of the designer's product. Our primary women’s apparel designers include Chanel, Brunello Cucinelli, Akris, Valentino, Dolce & Gabbana, Escada and The Row.
 
Women’s Shoes, Handbags and Accessories.  Women’s accessories include belts, gloves, scarves, hats and sunglasses and complement our shoes and handbags assortments. Our primary designers in this category include Christian Louboutin, Chanel, Manolo Blahnik, Valentino, Saint Laurent, Jimmy Choo and Gucci in ladies' shoes and Chanel, Prada, Gucci, Bottega Veneta, Balenciaga, Saint Laurent, Louis Vuitton, Chloe and Celine in handbags.
 
Men’s Apparel and Shoes.  Men’s apparel and shoes include suits, dress shirts and ties, sport coats, jackets, trousers, casual wear and eveningwear as well as business and casual footwear. Our primary designers in this category include Ermenegildo Zegna, Brioni, Brunello Cucinelli, Burberry and Tom Ford in men’s clothing and sportswear and Ermenegildo Zegna, Brioni, Salvatore Ferragamo, Gucci and Tom Ford in men’s accessories and shoes.


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Cosmetics and Fragrances.  Cosmetics and fragrances include facial and skin cosmetics, skin therapy and lotions, soaps, fragrances, candles and beauty accessories. Our primary designers of cosmetics and beauty products include La Mer, Chanel, Sisley, Creed, La Prairie, Estee Lauder, Dior and Tom Ford.
 
Designer and Precious Jewelry.  Our designer and precious jewelry offering includes women’s necklaces, bracelets, rings, earrings and watches that are selected to complement our apparel merchandise offering. Our primary designers in this category include David Yurman, John Hardy and Ippolita in designer jewelry and Chanel and Van Cleef & Arpels in precious jewelry. We often sell precious jewelry that has been consigned to us from the designer.

Home Furnishings and Decor.  Home furnishings and decor include linens, tabletop, kitchen accessories, furniture, rugs, decorative items (frames, candlesticks, vases and sculptures) and collectibles. Merchandise for the home complements our apparel offering in terms of quality and design. Our primary designers in this category include Jay Strongwater, MacKenzie-Childs and Baccarat.
 
Luxury and Fashion Designer Relationships
 
Our merchandise assortment consists of a broad selection of narrowly distributed, highly differentiated and distinctive luxury merchandise purchased from both well-known luxury designers and new and emerging fashion designers. We communicate with our designers frequently, providing feedback on current demand for their products, suggesting changes to specific product categories or items and gaining insight into their future fashion direction. Certain designers sell their merchandise or certain of their design collections exclusively to us and other designers sell to us pursuant to their limited distribution policies. Our relationships and purchasing power with designers allow us to obtain a broad selection of quality merchandise. Our women’s and men’s apparel and fashion accessories merchandise categories are especially dependent upon our relationships with designers. We monitor and evaluate the sales and profitability performance of each designer and adjust our future purchasing decisions from time to time based upon the results of this analysis. We have no guaranteed supply arrangements with our principal merchandising sources. In addition, our designer base is diverse, with only two designers representing more than 5% of our total revenues in fiscal year 2017. These designers represented 8.9% and 5.9% of our total revenues in fiscal year 2017. The breadth of our sourcing helps mitigate risks associated with a single brand or designer.
 
Consistent with industry business practice, we receive allowances from certain of our designers in support of the merchandise we purchase for resale. We also receive advertising allowances from certain of our designers, substantially all of which represent reimbursements of direct, specified and incremental costs we incur to promote the designers' merchandise. In addition, we receive allowances from certain merchandise designers in conjunction with compensation allowances for employees who sell the designers' merchandise. For more information related to allowances received from designers, see Note 1 of the Notes to Consolidated Financial Statements in Item 15.
 
To expand our product assortment, we offer certain merchandise, primarily precious jewelry, that has been consigned to us from the designer. As of July 29, 2017 and July 30, 2016, we held consigned inventories with a cost basis of approximately $393.1 million and $416.5 million, respectively. Consigned inventories are not reflected in our Consolidated Balance Sheets as we do not take title to consigned merchandise.

Inventory Management

 We manage our inventory on an omni‑channel basis, and our processes and facilities are designed to optimize merchandise productivity. In the first quarter of fiscal year 2017, we launched an integrated merchandising and distribution system, which we refer to as "NMG One". NMG One was designed to enable us to purchase, share, manage and sell our inventories across our omni-channel operations and brands more efficiently.

The majority of the merchandise we purchase is initially received at one of our centralized distribution facilities. We utilize distribution facilities in Longview, Texas, the Dallas-Fort Worth area, Pittston, Pennsylvania and Munich, Germany and three regional service centers in the United States. Our distribution facilities are linked electronically to our various merchandising teams to facilitate the distribution of goods to our stores.
 
We utilize electronic data interchange technology with certain of our designers, which is designed to move merchandise onto the selling floor quickly and cost-effectively by allowing designers to deliver floor-ready merchandise to the distribution facilities. In addition, we utilize high-speed automated conveyor systems capable of scanning the bar-coded labels on incoming cartons of merchandise and directing the cartons to the proper processing areas. Many types of merchandise are processed in the receiving area and immediately “cross docked” to the shipping dock for delivery to the stores. Certain processing areas are staffed with personnel equipped with hand-held radio frequency terminals that can scan a designer's bar

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code and transmit the necessary information to a computer to record merchandise on hand. We utilize third party carriers to distribute our merchandise to individual stores.
 
We operate primarily on a pre-distribution model through which we allocate merchandise on our initial purchase orders to each store. This merchandise is shipped from our designers to our distribution facilities for delivery to designated stores. We closely monitor the inventory levels and assortments in our retail stores to facilitate reorder and replenishment decisions, satisfy customer demand and maximize sales.
 
We utilize a “locker stock” inventory management program to maintain a portion of our most in-demand and high fashion merchandise at our Longview and Pittston distribution facilities. Locker stock inventory can be shipped to the stores that demonstrate the highest customer demand or directly to our store and online customers. This program helps us to restock inventory at individual stores more efficiently, to maximize the opportunity for full-price selling and to minimize the potential risks related to excess inventories.
 
The two distribution centers in the Dallas-Fort Worth area support primarily our online operations in the United States, and our distribution center outside of Munich, Germany supports our MyTheresa operations. These distribution centers facilitate the receipt and storage of inventories from designers, fulfill customer orders on a timely and efficient basis and receive, research and process customer returns.
 
Capital Investments
 
We invest capital to support our long-term business goals and objectives with a goal of generating strong financial returns. We invest capital in the development and construction of new and existing stores, online platforms, distribution and support facilities and information technology. Since fiscal year 2013, we have made gross capital expenditures aggregating $1.1 billion related primarily to (i) enhancements to our merchandising and store systems; (ii) investments in our online platforms and technology and information systems; (iii) the construction of new stores in Garden City, New York (Long Island) (opened in fiscal year 2016) and in Fort Worth, Texas (opened in fiscal year 2017) and a distribution facility in Pittston, Pennsylvania; and (iv) the remodel of our Bergdorf Goodman women's and men’s stores in New York City and Neiman Marcus stores in the following cities:

Bal Harbour, Florida;
Chicago, Illinois;
Oak Brook, Illinois;
Beverly Hills, California; and
Palo Alto, California.

In fiscal year 2017, we had gross capital expenditures of approximately $205 million. Net of developer contributions, capital expenditures for fiscal year 2017 were approximately $167 million. Currently, we project gross capital expenditures for fiscal year 2018 to be $208 to $218 million. Net of developer contributions, capital expenditures for fiscal year 2018 are projected to be $155 to $165 million.

We are focused on operating only in attractive markets that can profitably support our stores as well as maintaining the quality of our stores and online platforms and, consequently, our brands. We conduct extensive demographic, marketing and lifestyle research to identify attractive retail markets with a high concentration of our target customers prior to our decision to construct a new store. We typically receive cash allowances from developers related to the construction of our stores, thereby reducing our cash investment in these stores. We received construction allowances aggregating $37.4 million in fiscal year 2017, $38.3 million in fiscal year 2016 and $34.7 million in fiscal year 2015. Our recent and upcoming Neiman Marcus store openings significantly expand our presence in New York:

Roosevelt Field: We opened a 111,000 square‑foot full‑line Neiman Marcus store in Garden City, New York in February of fiscal year 2016.
Hudson Yards: We signed a lease to open a flagship full‑line Neiman Marcus store on Manhattan’s flourishing west side at Hudson Yards, a new $25 billion, 28‑acre mixed‑use development project. The approximately 190,000 square‑foot, multi‑level store, which we currently expect to open in fiscal year 2019, marks the first full‑line Neiman Marcus store in New York City and will anchor the one‑million square‑foot Shops at Hudson

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Yards. This new store will offer Neiman Marcus’s signature mix of the world’s most exclusive luxury designers and superior customer service to New York residents and visitors.
    
In addition to the construction of new stores, we also invest in our existing stores to drive traffic, increase our selling opportunities and enhance customer service.

Competition
 
The luxury retail industry is highly competitive and fragmented. We compete for customers with luxury and premium multi-branded retailers, designer-owned proprietary boutiques, specialty retailers, national apparel chains, pure-play online retailers, individual specialty apparel stores and "flash sale" businesses that primarily sell out-of-season products. We compete for customers principally on the basis of quality and fashion, customer service, value, assortment and presentation of merchandise, marketing and customer loyalty programs and, in the case of Neiman Marcus and Bergdorf Goodman, store ambiance. Retailers that compete directly with us for distribution of luxury fashion brands include Saks Fifth Avenue, Barneys New York, Net-a-Porter, designer boutiques and other national, regional and local retailers. Nordstrom and Bloomingdale's feature a limited offering of luxury merchandise and compete with us to a lesser extent.
 
We believe we differ from other national retailers by:

our approach to omni-channel retailing;
distinctive merchandise assortments, which we believe are more upscale than other luxury and premium multi-branded retailers, and exclusive merchandise offerings that are only available in our stores;
excellent customer service;
prime real estate locations;
premier online websites; and
elegant shopping environments.

We believe we differentiate ourselves from regional and local luxury and premium retailers through:

our omni-channel approach to business;
strong national brands;
diverse product selection;
loyalty program;
customer service;
prime shopping locations; and
strong designer relationships that allow us to offer the top merchandise from each designer.
    
Designer-owned proprietary boutiques and specialty stores carry a much smaller selection of designer brands and merchandise, lack the overall shopping experience we provide, have a limited number of retail locations and generally offer more restrictive return policies.
 
Employees
 
As of October 3, 2017, we had approximately 13,700 full-time employees. Our staffing requirements fluctuate during the year as a result of the seasonality of the retail industry. We hire additional temporary associates and increase the hours of part-time employees during seasonal peak selling periods. Except for certain employees of Bergdorf Goodman representing less than 1% of our total employees, none of our employees are subject to a collective bargaining agreement. We believe that our relations with our employees are good.


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Seasonality
 
Our business, like that of most retailers, is affected by seasonal fluctuations in customer demand, product offerings and working capital expenditures. For additional information on seasonality, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Seasonality.”
 
Intellectual Property
 
We own certain tradenames and service marks, including the “Neiman Marcus,” “Bergdorf Goodman” and "mytheresa" marks, that are important to our overall business strategy. These marks are valuable assets that consumers associate with luxury goods.

Regulation
 
The credit card operations that are conducted under our arrangements with Capital One are subject to numerous federal and state laws that impose disclosure and other requirements upon the origination, servicing and enforcement of credit accounts and limitations on the maximum amount of finance charges that may be charged by a credit provider. In addition to our proprietary credit cards, credit to our customers is also provided primarily through third parties. Any regulation or change in the regulation of credit arrangements that would materially limit the availability of credit to our customer base could adversely affect our results of operations or financial condition.
 
Our practices, as well as those of our competitors, are subject to review in the ordinary course of business by the Federal Trade Commission and are subject to numerous federal and state laws. Additionally, we are subject to certain customs, anti-corruption laws, truth-in-advertising and other laws, including consumer protection regulations that regulate retailers generally and/or govern the importation, promotion and sale of merchandise. We undertake to monitor changes in these laws and believe that we are in material compliance with all applicable state and federal regulations with respect to such practices.

Additional Information

For more information about our business, financial condition and results of operations, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and the related notes thereto contained in Item 15.

We also make our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and related amendments, available free of charge through our website at www.neimanmarcusgroup.com as soon as reasonably practicable after we electronically file such material with (or furnish such material to) the Securities and Exchange Commission (the "SEC").  The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered to be part of this Annual Report on Form 10-K.
 
Copies of the reports and other information we file with the SEC may also be examined by the public without charge at 100 F Street, N.E., Room 1580, Washington D.C., 20549, or on the internet at http://sec.gov. Copies of all or a portion of such materials can be obtained from the SEC upon payment of prescribed fees. Please call the SEC at 1-800-SEC-0330 for further information.


ITEM 1A.     RISK FACTORS
 
Risks Related to Our Business and Industry
 
Our success and results of operations depend heavily on our ability to maintain a relevant, enjoyable and reliable omnichannel experience for our customers and to anticipate and meet our customers’ evolving shopping preferences.

As an omni‑channel retailer, we interact with our customers across a variety of different channels, including in‑store, online, mobile devices, and social media, all in a rapidly evolving retail and shopping landscape. Our customers are increasingly using tablets and mobile phones to make purchases online and facilitate purchasing decisions when in our stores. Our customers also engage with us online by providing feedback and public commentary about all aspects of our business.

Omni‑channel retailing is rapidly evolving and our success depends on our ability to differentiate our brand and product offerings by anticipating and implementing innovations in customer experience and logistics to appeal to customers

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who increasingly rely on multiple channels to meet their shopping needs. To do so, we must make investments to keep up to date with competitive technology trends, including the proliferation of mobile usage, evolving creative user interfaces and other e‑commerce marketing trends related to customer acquisition and engagement, among others, which may increase our costs and which may not succeed in increasing sales or attracting customers. Although we continually analyze trends in the way our customers shop and the relationships between our in-store and online offerings in an effort to maximize incremental sales, we may not gather accurate and relevant data or effectively utilize that data to accurately predict our customers' shopping preferences, which may impact our strategic planning and decision making.

If for any reason we are not successful at developing and implementing omni‑channel initiatives to provide a convenient, consistent and enjoyable shopping experience for our customers across all channels and to provide our customers the products they want, when and where they want them, our financial performance and brands could be adversely affected.

Economic conditions may negatively impact consumer spending and demand for our merchandise.
 
We sell luxury retail merchandise. Purchases of merchandise by our customers are discretionary, and therefore highly dependent upon the level of consumer spending, particularly among affluent customers. A number of factors affect the level of consumer spending on our merchandise, and in turn our revenues and comparable revenues, including:
 
general economic and industry conditions, including inflation, deflation, changes related to interest rates and foreign currency exchange rates, rates of economic growth, current and expected unemployment levels and government fiscal and monetary policies; 
the performance of the financial, equity and credit markets; 
consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt and consumer behaviors towards incurring and paying debt;
national and global geo-political uncertainty;
the strength of the U.S. dollar against international currencies, most notably the Euro and British pound, and a resulting impact on tourism and spending by international customers in the U.S.;
a significant and sustained decline in the global price of crude oil and the resulting impact on stakeholders in the oil and gas industries, particularly in the Texas markets in which we have a significant presence;
changes in prices for commodities and energy, including fuel; and 
current and expected tax rates and policies.
 
We believe that the factors identified in the list above are constraining customers' willingness to shop with us and causing some of those who do shop to limit the dollar amounts or quantities of their purchases. This has caused our operating results to decline. As a consequence, we recorded significant impairment charges in fiscal years 2017 and 2016 related to certain of our tradenames, goodwill and long-lived assets. Additionally, past deteriorations in domestic and global economic conditions, such as the downturn in calendar years 2008 and 2009, have had a significant adverse impact on our business by causing reductions in customer spending. If the current difficult economic conditions and their effect on customer spending on luxury goods continue, we could experience further material and adverse effects on our business, financial condition and results of operations.
 
The luxury retail industry is highly competitive and our failure to compete effectively with other retailers could negatively impact our results of operations and our customers' perceptions of us.
 
The luxury retail industry is highly competitive and fragmented. We compete for customers with luxury and premium multi-branded retailers, designer-owned proprietary boutiques, specialty retailers, national apparel chains, pure-play online retailers, individual specialty apparel stores and "flash sale" businesses that primarily sell out-of-season products. Many of our competitors have greater financial, marketing or operational resources than we do.

We face strong competition to attract and retain new customers, maintain relationships with existing customers and obtain merchandise from key designers. We compete for customers principally on the basis of quality and fashion, customer service, value, assortment and presentation of merchandise, marketing and customer loyalty programs, store ambiance, availability of in-store services and online experience and accessibility. The availability of in-store service and experience offerings, such as dining, beauty and salon services and special events is another dimension of competition as retailers seek to

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draw customers to their stores. We believe our success in continuing to offer customers desirable in-store experiences and identifying and executing on new opportunities in this area is an important component of our competitive positioning.

Our failure to compete successfully based on these and other factors may have an adverse effect on our results of operations and cause us to lose market share to our competitors.

The continuing migration to online shopping and increasing availability of luxury merchandise online has diverted sales from physical stores and increased the intensity of in-store and online price competition among retailers. In the current business environment, many retailers are engaging in aggressive pricing competition strategies, including significant discounting of merchandise and the discounting or elimination of costs for services such as alterations or shipping. We may be required to engage in similar practices to compete with such retailers and attempt to preserve or increase market share, which could negatively impact our revenues, margins and reputation as a luxury retailer.

A number of other competitive factors could have an adverse effect on our business, financial condition and results of operations, including:

expansion of product or service offerings by existing competitors; 
entry by new competitors into markets and channels in which we currently operate;
alteration of the distribution channels used by designers for the sale of their goods to consumers; and
adoption by existing competitors of innovative retail sales methods.

Our failure to compete successfully with our existing or new competitors may have a material adverse effect on our business, financial condition and results of operations.
If we fail to anticipate and identify merchandise fashion trends and accurately forecast demand, our business, financial condition and results of operations may be adversely affected.
We make decisions regarding the purchase of our merchandise inventory well in advance of the season in which it will be sold. For example, women’s apparel, men’s apparel, shoes and handbags are typically ordered six to nine months in advance of the date the merchandise will be offered for sale, while jewelry and other categories are typically ordered three to six months in advance of such date. Meanwhile, the increasing use of digital and social media by consumers as a driver of fashion demand has contributed to consumers’ anticipation and expectation that particular items of merchandise be available within a very short timeframe from their introduction.
If our sales during any season or for any particular merchandise product category are significantly lower than we anticipated, we may not be able to adjust our expenditures for inventory and other expenses in a timely fashion and may be left with significant amounts of unsold inventory. If that occurs, we may be forced to rely on markdowns or promotional sales to dispose of excess or slow-selling inventory, which may negatively impact our gross margins, results of operations and cash flows. Conversely, if we fail to purchase a sufficient quantity of in-demand merchandise items, we may be unable to meet consumer demand, lose sales opportunities or adversely affect our customer relationships and reputation as a premier luxury retailer. Any failure on our part to anticipate, identify and respond effectively to fashion trends and merchandise demand could adversely affect our business, financial condition and results of operations.
We focus on providing a seamless, cohesive and high-quality experience through our omnichannel retail model, which adds complexities to our business that create additional risk.

With the expansion of the integrated omni‑channel retail model, including through the implementation of NMG One, we believe our overall business has become and will continue to become more complex. These changes require us to develop new expertise in response to the new challenges, risks and uncertainties inherent in the delivery and execution of an integrated omni‑channel retailing model. For example, issues related to the implementation of NMG One, which we launched in the first quarter of fiscal year 2017, resulted in disruptions to our business and adversely affected our results of operations during fiscal year 2017. While we believe substantially all the issues related to the implementation of that project have been remediated, future omni-channel initiatives could cause additional disruptions to our business.  As we continue to execute our plans and evolve and transform our omni-channel strategy, we may not adequately manage the related organizational or technological changes to align with our strategy, make investments at the right time or pace or in the right manner, or appropriately implement, monitor, report or communicate the changes in an effective manner.

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We are also vulnerable to certain additional risks and uncertainties associated with our e‑commerce websites, including changes in required technology interfaces, website downtime and other technical failures, internet connectivity issues, costs and technical issues as we upgrade our website software, computer viruses, changes in applicable federal and state regulations, security breaches and consumer privacy concerns. Our failure to successfully respond to these risks and uncertainties, properly allocate our capital between the store and online environment, make the appropriate level of investments in customer-facing technology, or adapt our store operations to the integrated omni‑channel retail model could adversely affect our revenues or margins as well as damage our reputation, brands and competitive position.
We depend on the success of our advertising and marketing programs.
Our business depends on attracting a high volume of customers who are likely to purchase our merchandise. We have a significant number of marketing initiatives and regularly fine‑tune our approach and adopt new ones, including continuing efforts to ensure our marketing activities are aligned with all of the different ways in which customers currently shop. However, there can be no assurance that we will be able to effectively execute our advertising and marketing programs in the future, and any failure to do so could adversely affect our business, financial condition and results of operations.
In particular, our InCircle loyalty program is designed to cultivate long‑term relationships with our customers and enhance the quality of service we provide to our customers. We must constantly monitor and update the terms of this loyalty program so that it continues to meet the demands and needs of our customers and remain competitive with loyalty programs offered by other luxury and premium multi‑branded retailers. Almost 40% of our total U.S. revenues in fiscal year 2017 were generated by our InCircle loyalty program members who achieved reward status. If our InCircle loyalty program were to fail to provide competitive rewards and quality service to our customers, our business and results of operations could be adversely affected.
Our business depends significantly on our ability to drive customer traffic to our retail stores, and such efforts can be costly and are subject to numerous operational and other risks.

In-store sales constitute a majority of our revenues and such sales rely on customer traffic. We believe customer traffic at our stores is driven by a number of Company-specific factors including location, store ambiance, the availability of in-store service and experience offerings, such as dining, beauty and salon services and special events, as well as customer traffic at surrounding stores and business. Many of our stores are located in desirable locations within shopping malls and benefit from the abilities that we and other anchor tenants have to generate consumer traffic. A substantial decline in mall traffic, the development of new shopping malls, the availability of locations within existing or new shopping malls, the success of individual shopping malls and the success of other anchor tenants may negatively impact our ability to maintain or grow our sales in existing stores, as well as our ability to open new stores, which could have an adverse effect on our financial condition or results of operations. In addition, increased availability of online shopping has contributed to a reduction of customer traffic at many other retailers which can lead to financial difficulties of shopping center tenants and, in turn, potential shopping center vacancies, all of which can further reduce customer traffic at these locations. Any of these factors may affect our stores. Certain of our stores may be impacted by other location-specific issues.
We routinely evaluate potential expansions and/or remodels of our existing stores to enhance the customer experience in an effort to increase sales. Store expansions or remodels often involve significant up-front costs, disruptions to the customer experience that can reduce traffic and sales and, in some cases, timing uncertainties. In undertaking store expansions or remodels, we must complete the expansion or remodel in a timely, cost‑effective manner, minimize disruptions to our existing operations and succeed in creating an improved shopping environment that increases customer traffic and revenues. Our ability to complete expansions and remodels is also subject to our ability to fund them through cash flows from operations or indebtedness.
We believe our customer traffic and in-store revenue results are strongly dependent on our success in continuing to offer customers desirable in-store experiences through remodels and other service offerings. Our failure to provide a desirable in-store customer experience, as well as other customer traffic trends or declines that may be outside of our control, could adversely affect our revenues and results of operations.
Our expansion and growth through the opening of new retail stores is subject to numerous risks, some of which are beyond our control.
The success of our business is dependent on our ability to develop and execute our growth strategies. Our continued growth depends, in part, on our successful development, opening and operation of new stores. Successful execution of this strategy depends upon a number of factors, including our ability to identify suitable sites for new stores, negotiate and execute

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leases on acceptable terms, construct, furnish and supply a store in a timely and cost effective manner, accurately assess the demographic or retail environment at a given location, hire and train qualified personnel, obtain necessary permits and zoning approvals, obtain commitments from a core group of vendors to supply a new store, integrate a new store into our distribution network and build customer awareness and loyalty. Our new stores are typically large‑scale construction projects that are subject to numerous risks. Construction costs may exceed our original estimates due to increases in materials, labor or other costs, and we may experience permitting or construction delays, which may further increase project costs and delay projected sales. These risks may be exacerbated to the extent we engage third party developers or contractors in connection with such projects or are subject to approvals of regulatory bodies to complete the projects. For example, the Shops at Hudson Yards project is a significant, multi‑year development project managed by a third party and we cannot assure you that the project, including the full‑line Neiman Marcus store, will be completed within the timeframe or budget that we currently contemplate. As each new store represents a significant investment of capital, time and other resources, delays or failures in opening new stores, or achieving lower than expected sales in new stores, could materially and adversely affect our growth. In addition, new store openings involve the risks described under "Our performance and results of operations may be adversely affected by the significant costs associated with our expansion and growth strategies."
Our growth strategies may also lead us to expand into additional geographical markets in the future, either by opening new stores or through acquisitions. These markets may have different competitive conditions, consumer trends and discretionary spending patterns than our existing markets, which may cause our operations in these markets to be less successful than in our existing markets.
Failure to execute on these or other aspects of our growth strategies in a cost-effective manner could adversely affect our revenues and results of operations.
Our performance and results of operations may be adversely affected by the significant costs associated with our expansion and growth strategies.
We have made and intend to continue making significant ongoing investments to support our expansion and growth strategies. For example, we make capital investments in our new and existing stores, websites, omni‑channel model and distribution and support facilities, as well as in information technology, and incur expenses for headcount, advertising and marketing, professional fees and other costs in support of our growth initiatives. The amounts of such investments, expenses and costs are often difficult to predict because they require us to anticipate our customers’ needs, our needs as we grow, trends within our industry and our competitors’ actions. If we fail to accurately predict the amounts of or returns on these investments, expenses and costs, our results of operations could be adversely affected.
Investments and partnerships in new business strategies and acquisitions could impact our business, financial performance and results of operations.
We may, from time to time, acquire other businesses, such as our acquisition of MyTheresa in October 2014, or make other investments in businesses or partnerships. Such acquisitions or investments would subject us to additional associated risks, including the integration of operations and personnel, the achievement of any expected operational, branding and other synergies and strategic benefits, and the diversion of management resources to effect and implement acquisitions. These acquisitions and investments may not perform as expected or cause us to assume liabilities unrecognized or underestimated in due diligence. In addition, we may be unable to retain key employees in any business we acquire, we may experience difficulty integrating any businesses we acquire, and any such acquisitions may result in the diversion of our capital and our management’s attention from other business issues and opportunities, any of which could harm our business, financial performance and results of operations.
A significant portion of our revenue is from our stores in four states, which exposes us to economic circumstances unique to or catastrophic occurrences affecting those states.
Our stores located in California, Florida, New York and Texas together represented approximately 50% of our revenues in fiscal year 2017. As a result, we are more vulnerable to economic and other conditions in those states, particularly the major metropolitan areas in those states, than our more geographically diversified competitors. Any events or circumstances that negatively affect those states could materially adversely affect our revenues and profitability.

The sustained reduction in oil prices that began in early calendar year 2014 has caused particular stress to the Texas economy, including in the major metropolitan areas where our seven Texas stores are located. We believe that this stress has negatively impacted the performance of our Texas stores, as a significant number of those stores' customers are employed or invested in, or otherwise affected by, the energy sector and are reducing their discretionary spending on items such as our

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luxury merchandise. The trajectory of energy prices is uncertain and our Texas stores' performance may continue to be impacted by the performance of companies in the energy sector.

Additionally, our stores in California, Florida and New York are located in cities that host a large number of international travelers to the United States. We believe that the current relative strength of the dollar against other international currencies, including the Euro, is affecting the willingness of tourists and other non-U.S. customers to buy luxury merchandise from our stores in those states as the strength of the dollar relative to their home currencies makes our merchandise more expensive to them on a relative basis. Recent developments such as the United Kingdom's initiation of negotiations to leave the European Union and subsequent related developments, including the possibility of similar initiatives by other European countries, may lead to additional global economic uncertainty that could cause the dollar to remain strong relative to the Euro and the British pound, which could continue to affect the performance of our California, Florida and New York stores.

Other factors that may affect the results of operations of our stores located in those states include, among other things, changes in demographics, population and employee bases, wage increases, future changes in economic conditions, severe weather conditions such as Hurricane Harvey and Hurricane Irma, which significantly impacted and required temporary closure of our stores in Houston, Texas and in Florida when they made landfall during the first quarter of fiscal year 2018, and other catastrophic occurrences. Such conditions may result in reduced customer traffic and spending in our stores, physical damage to our stores, loss of inventory, closure of one or more of our stores, inadequate work force in our markets, temporary disruption in the supply of merchandise, delays in the delivery of merchandise to our stores and a reduction in the availability of merchandise in our stores. Any of these factors may disrupt our business and materially adversely affect our business, financial condition and results of operations.

We are dependent on our relationships with certain designers, vendors and other sources of merchandise.
     
Our relationships with established and emerging designers are a key factor in our success as a luxury merchandise retailer because sales of designer merchandise represent a substantial portion of our revenues. Many of our key vendors limit the number of retail channels they use to sell their merchandise and we have no guaranteed supply arrangements with our principal sources of merchandise. In addition, nearly all of our top designer brands are sold by competing retailers and have their own proprietary retail stores and/or websites. Accordingly, there can be no assurance that any of such sources or designers will continue to sell to us or meet our quality, style and volume requirements.
 
If one or more of our top designers were to (i) limit the supply of merchandise made available to us for resale on a wholesale basis or otherwise, (ii) increase the supply of merchandise made available to our competitors, (iii) increase the supply of merchandise made available to their own proprietary retail stores and websites or significantly increase the number of their proprietary retail stores, (iv) convert the distribution of merchandise made available to us from a wholesale arrangement to a concession arrangement (whereby the designer merchandises its boutique within our store and pays us a pre-determined percentage of the revenues derived from the sale of such merchandise), which certain of our key vendors have done, or (v) cease the wholesale distribution of their merchandise to retailers, our business could be adversely affected. Any decline in the quality or popularity of our top designer brands could also adversely affect our business.
 
During periods of adverse change in general economic, industry or competitive conditions, some of our designers and vendors may experience cash flow issues, reductions in available credit from banks, factors or other financial institutions, or increases in the cost of capital. In response to those conditions or to concerns about our financial condition, such designers and vendors may attempt to increase their prices, alter historical credit and payment terms available to us or take other actions. Any of these actions could have an adverse impact on our relationships with such designers or vendors, or constrain the amounts or timing of our purchases from such designers or vendors, and, ultimately, have an adverse effect on our revenues, results of operations and liquidity.

A material disruption in our information systems could adversely affect our business or results of operations.
We rely on our information systems to process transactions, summarize our results of operations and manage our business. The reliability and capacity of our information systems is critical to our operations and the implementation of our growth initiatives. Our information systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyber‑attack or other security breaches and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes, acts of war or terrorism and usage errors by our employees. If our information systems are damaged or cease to function properly, we may have to make a significant investment to fix or replace them, and we may suffer losses of critical data and/or interruptions or delays in our operations.

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Additionally, our websites or mobile e-commerce platforms may suffer future outages or instability despite our efforts and investments and such outages may cause us to lose sales or lead us to offer promotions that could negatively impact our margins. To keep pace with changing technology, we must continuously implement new information technology systems as well as enhance our existing systems. Moreover, the successful execution of some of our growth strategies, in particular the expansion of our omni‑channel and online capabilities, is dependent on the design and implementation of new systems and technologies and/or the enhancement of existing systems. Issues related to the implementation of NMG One, which we launched in the first quarter of fiscal year 2017, resulted in disruptions to our business and adversely affected our results of operations during fiscal year 2017. While we believe substantially all the issues related to the implementation of that project have been remediated, future omni-channel initiatives could cause additional disruptions to our business.  Additionally, we are developing and implementing a process of updating our data storage center, which may involve outsourcing one or more of our data center functions to a third-party provider, migrating functions to the cloud or physically relocating all or some of our own data storage hardware to a new location. This process is in the very early stages, and it is possible that we may experience interruption to our operations in the course of completing this complex but necessary information technology initiative.
Any material disruption in our information systems, or delays or difficulties in implementing or integrating new systems or enhancing or expanding current systems, could have an adverse effect on our business, in particular our online operations, and results of operations.
An impairment of the carrying value of goodwill or other indefinite-lived intangible assets has negatively affected and may in the future negatively affect our financial results and net worth.
Indefinite-lived intangible assets, such as our Neiman Marcus, Bergdorf Goodman and MyTheresa tradenames and goodwill, are not subject to amortization but are tested for impairment in the fourth quarter of each fiscal year and upon the occurrence of certain events. We test indefinite-lived intangible assets by comparing the fair value of the assets to their estimated fair values. Similarly, we test goodwill at the reporting unit level by comparing the carrying value of the net assets of the reporting unit, including goodwill, to the unit's fair value. If the carrying values of indefinite-lived intangible assets or goodwill exceed their estimated fair value, an impairment charge is recorded to write down the intangible asset or goodwill to its estimated fair value. Factors that could result in an impairment include economic conditions, future business conditions and trends, projected revenues, earnings and cash flows as well as other market factors such as the weighted average cost of capital and valuation multiples. Based upon the review of our indefinite-lived intangible assets and our goodwill, we recorded impairment charges to our indefinite-lived intangible assets aggregating $309.7 million in fiscal year 2017 and $228.9 million in fiscal year 2016 and to our goodwill balances aggregating $196.2 million in fiscal year 2017 and $199.2 million in fiscal year 2016. Future impairment charges could be required if we do not achieve our current cash flow, revenue and profitability projections, market royalty rates decrease or the weighted average cost of capital increases. This could negatively affect our financial results and net worth.

Our continued success is substantially dependent on positive perceptions of our company, which, if eroded, could adversely affect our customer, employee and vendor relationships.

We have a reputation associated with a high level of integrity, customer service and quality merchandise, which is one of the reasons customers shop with us and employees choose us as a place of employment. To be successful in the future, we must continue to preserve, grow and leverage the value of our reputation. Reputational value is based in large part on perceptions. While reputations may take decades to build, negative incidents or developments, including actions taken by our business partners, industry conditions or our operating performance and liquidity and/or perceptions as to our performance and liquidity, can quickly erode trust and confidence, particularly if they result in adverse mainstream and social media publicity, governmental investigations or litigation. Any significant damage to our reputation could negatively impact sales, diminish customer trust, reduce employee morale and productivity, lead to difficulties in recruiting and retaining qualified employees or cause difficulties in our vendor or other business and financial relationships.

A breach in information privacy could negatively impact our operations.
 
The protection of our customer, employee and company data is critically important to us. We utilize customer data collected through both our proprietary credit card programs and our in-store and online activities. Additionally, we may share personal information with certain third party vendors and service providers as needed for them to assist with various aspects of our business. Our customers and employees have a high expectation that we will adequately safeguard and protect their personal information. Despite our security measures and our requirements that third party vendors and service providers maintain security measures to the extent they have access to personal information, our or our vendors’ information technology and infrastructure may be vulnerable to criminal cyber-attacks or security incidents due to employee error, malfeasance or other vulnerabilities. The increased use of mobile phones, tablets and wireless networks to make purchases and to transmit data has

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further increased the complexity and cost associated with ensuring protection of transmitted information. During the ordinary course of business, the Company experiences and expects to continue to experience limited compromises or potential compromises of personal information due to unauthorized external attempts to access information and has experienced significant compromises in the past including those described below. Any such incident could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. In addition, we outsource certain functions, such as customer communication platforms and credit card transaction processing, and these relationships allow for the storage and processing of customer information by third parties, which could result in security breaches impacting our customers.

We have taken steps to further strengthen the security of our computer systems and continue to assess, maintain and enhance the ongoing effectiveness of our information security systems. However, the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often are not recognizable until launched against a target. Accordingly, we may be unable to anticipate these techniques or implement adequate preventative measures. It is therefore possible that in the future we may suffer a criminal attack, unauthorized parties may gain access to personal information in our possession and we may not be able to identify any such incident in a timely manner.

As described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we incurred costs in fiscal years 2017, 2016 and 2015 associated with a cyber-attack that we discovered in January 2014 relating to the clandestine installation of malicious software on our computer systems that attempted to collect payment card data (the “Cyber-Attack”), including investigative, legal and other costs. In the future, state enforcement authorities may also impose fines or other remedies against us. Such costs are not currently estimable but could be material to our future results of operations.

As described in Item 3, "Legal Proceedings" and Note 12 of the Notes to Consolidated Financial Statements in Item 15, the Cyber-Attack gave rise to putative class action litigation on behalf of customers and regulatory investigations. This putative class action has settled and the settlement agreement has received preliminary approval by the court. At this point, we are unable to predict the developments in, outcome of, and economic and other consequences of pending litigation or government inquiries related to this matter. Any future criminal cyber-attack or data security incident may damage our reputation and relationships with our customers and may result in additional regulatory investigations, legal proceedings or liability under laws that protect the privacy of personal information, all of which may adversely affect our business, financial condition and results of operations.
 
Conditions in the countries where we source our merchandise and international trade conditions could adversely affect us.
 
A substantial majority of our merchandise is manufactured overseas, mostly in Europe and, to a lesser extent, China, Mexico and South America, and delivered to us by our vendors as finished goods. As a result, political or financial instability, labor strikes, natural disasters or other events resulting in the disruption of trade or transportation from other countries or the imposition of additional regulations relating to foreign trade could cause significant delays or interruptions in the supply of our merchandise or increase our costs, either of which could have an adverse effect on our business. If we are forced to source merchandise from other countries, such merchandise might be more expensive or of a different or inferior quality from the merchandise we now sell. If we were unable to adequately replace the merchandise we currently source with merchandise produced elsewhere, our business could be adversely affected.

Additionally, current political issues in the U.S., the United Kingdom and other European countries have created significant uncertainty regarding international trade policy. These developments are widely anticipated to increase regulatory complexities and, potentially, lead to the increase or implementation of import tariffs that may affect our costs of importing merchandise. Major adverse changes in trade policy or relations, including the imposition of tariffs on goods that we import or export could adversely affect our results of operations.

 Our business is affected by foreign currency fluctuations and inflation.
 
We purchase a substantial portion of our inventory from foreign suppliers whose costs are affected by the fluctuation of their local currency against the U.S. dollar or who price their merchandise in currencies other than the U.S. dollar. While fluctuations in the Euro-U.S. dollar exchange rate can affect us most significantly, we source merchandise from numerous countries and thus are affected by changes in numerous other currencies and, generally, by fluctuations in the value of the U.S. dollar relative to such currencies. During fiscal year 2015, the U.S. dollar began to strengthen against the Euro and other international currencies and the U.S. dollar remained relatively strong through fiscal years 2016 and 2017. The United Kingdom's June 2016 referendum to leave the European Union caused the values of the Euro and the British pound to decline further relative to the U.S. dollar and has created market uncertainty with respect to the future strength of the Euro and the British pound, which may contribute to continued strength of the U.S. dollar relative to those currencies. We believe a stronger

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U.S. dollar may (i) create disincentives to, or changes in the pattern, practice or frequency of, travel to and spending by foreign tourists in the regions in which we operate our retail stores and (ii) increase U.S. consumers’ willingness or ability to travel abroad and purchase merchandise we offer for sale at relatively lower prices from foreign retailers. See "A significant portion of our revenue is from our stores in four states, which exposes us to economic circumstances or catastrophic occurrences affecting those states" above. In addition, we believe a strengthening of the U.S. dollar relative to foreign currencies, most notably the Euro, may impact the retail prices of merchandise offered for sale and/or our cost of goods sold. Any of these effects or their continuation could cause our revenues or product margins to decrease.

We have also experienced certain inflationary effects in our cost base due to increases in selling, general and administrative expenses, particularly with regard to employee health care and other benefits. Inflation can negatively impact our margins and profitability if we are unable to increase prices or cut costs to offset the effects of inflation in our cost base.

Funding requirements or benefit payment costs under our pension plan could impact our financial results and cash flows.

We sponsor a defined benefit pension plan and we are required to make funding contributions to the plan to maintain its funded status. Funding requirements are based on, among other things, actuarial assumptions regarding benefit costs and anticipated future returns on plan assets (which depend in part on future interest rates). Significant changes in interest rates, actuarial assumptions (including expected mortality rates), fluctuations in the fair value of plan assets and benefit payments could affect the funded status of our Pension Plan and could increase future funding requirements. Any significant increase in pension plan funding requirements or a decision to make voluntary lump-sum payments to plan participants could negatively impact our cash flows, financial condition, liquidity or results of operations.

Economic, political and other risks associated with our international operations could adversely affect our revenues and international growth prospects.
As part of our business strategy, we intend to increase our sales outside the United States. We have limited experience operating overseas subsidiaries and managing non‑U.S. employees and, as a result, may encounter cultural challenges with local practices and customs that may result in harm to our reputation and the value of our brands. Our international revenues are subject to a number of risks inherent to operating in foreign countries, and any expansion of our international operations will increase the effects of these risks. These risks include: (i) political or civil instability of foreign markets (including acts of terrorism) and general economic conditions; (ii) foreign governments’ restrictive trade policies; (iii) sudden policy changes by foreign agencies or governments; (iv) the imposition of, or increase in, duties, taxes, government royalties or non‑tariff trade barriers; (v) difficulty in collecting international accounts receivable and potentially longer payment cycles; (vi) restrictions on repatriation of cash and investments in operations in certain countries; (vii) problems entering international markets with different cultural bases, consumer preferences and competitive environments; (viii) labor unrest in foreign markets; (ix) compliance with laws and regulations applicable to international operations, such as the Foreign Corrupt Practices Act and regulations promulgated by the Office of Foreign Asset Control; and (x) operating in new, developing or other markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws and regulations relating to contract and intellectual property rights. Any of these risks could have a material adverse effect on our international operations and our growth strategy.
We outsource certain business processes to third party vendors, which subjects us to risks, including disruptions in our business, compromise of data and increased costs.
 
We outsource certain technology-related processes to third parties. These include credit card authorization and processing, insurance claims processing, payroll processing, record keeping for retirement and benefit plans and certain information technology functions. In addition, we depend on third party vendors for delivery of our merchandise from manufacturers and to our customers. We review outsourcing alternatives on a regular basis and may decide to outsource additional processes in the future. If third party providers fail to meet our performance standards and expectations, including with respect to data security, our reputation, revenues and results of operations could be adversely affected. In addition, we could face increased costs associated with finding replacement vendors or hiring new employees to provide these services in-house.

The loss of senior management or attrition among our buyers or key sales associates could adversely affect our business.
 
Our success in the global luxury merchandise industry is dependent on our senior management team, buyers and key sales associates. We rely on the experience of our senior management, and their knowledge of our business and industry would be difficult to replace. Several executives have departed the Company during fiscal years 2017 and 2016, and such departures cause us to incur costs and diversion of management attention to locate and retain quality replacements and to fulfill the

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functions of those positions until they are filled. Additionally, if we were to lose a portion of our buyers or key sales associates, our ability to benefit from long-standing relationships with key designers or to provide relationship-based customer service could suffer. We may not be able to retain our current senior management team, buyers or key sales associates and the loss of any of these individuals could adversely affect our business. We do not maintain key person insurance on any employee.

Our business may be adversely affected by union activities.
Certain employees of our Bergdorf Goodman stores, representing less than 1% of our total employees, are subject to a collective bargaining agreement. Additionally, some of our vendors that service our properties and contractors or subcontractors that may be hired for store construction or remodeling projects have unionized employees. We may experience disruptions at our stores or other pressure as a result of protests or other activities by our vendors' or our labor unions. Additionally, the unionization of a more significant portion of our workforce could increase the overall costs at the affected locations and adversely affect our flexibility to run our business competitively and otherwise adversely affect our business, financial condition and results of operations. 
Changes in our credit card arrangements and regulations with respect to those arrangements could adversely impact our business.
 
We maintain a proprietary credit card program through which credit is extended to customers and have a related marketing and servicing alliance with affiliates of Capital One. Pursuant to the Program Agreement, Capital One currently offers credit cards and non-card payment plans under both the "Neiman Marcus" and "Bergdorf Goodman" brand names. Also, we receive payments from Capital One based on sales transacted on our proprietary credit cards. These payments are based on the profitability of the credit card portfolio as determined under the Program Agreement and are impacted by a number of factors including credit losses incurred and our allocable share of the profits generated by the credit card portfolio, which in turn may be impacted by credit ratings as determined by various rating agencies. In addition, we receive payments from Capital One for marketing and servicing activities we provide to Capital One. The Program Agreement terminates in July 2020 (renewable thereafter for three-year terms), subject to early termination provisions.
 
In connection with the Program Agreement, we have changed and may continue to change the terms of credit offered to our customers. In addition, Capital One has discretion over certain policies and arrangements with credit card customers and may change these policies and arrangements in ways that affect our relationships with these customers. Our credit ratings also impact revenue sharing under the Program Agreement. Beginning in July 2017, in accordance with the provisions of the credit card program agreement, our allocable share of the profits generated by the credit card portfolio was reduced as a result of our current credit ratings by S&P and Moody's. Moreover, changes in credit card use, payment patterns and default rates may result from a variety of economic, legal, social and other factors that we cannot control or predict with certainty. Any such changes in our credit card arrangements may adversely affect our credit card program and, ultimately, our business.

Credit card operations such as our proprietary program through Capital One are subject to numerous federal and state laws such as the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the "CARD Act") and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") that impose disclosure and other requirements upon the origination, servicing and enforcement of credit accounts and limitations on the maximum amount of finance charges that may be charged by a credit provider . The CARD Act included new and revised rules and restrictions on credit card pricing, finance charges and fees, customer billing practices and payment application. The Dodd-Frank Act was enacted in July 2010 and increased the regulatory requirements affecting providers of consumer credit. These changes significantly restructured regulatory oversight and other aspects of the financial industry, created a new federal agency to supervise and enforce consumer lending laws and regulations and expanded state authority over consumer lending. Additional regulation under these statutes and interpretations of these new rules may be implemented and we may be required to make changes to our credit card practices and systems. Any regulation or change in the regulation of credit arrangements, pursuant to the CARD Act, the Dodd-Frank Act or otherwise, that would materially limit the availability of credit to our customer base could adversely affect our business.

We are subject to risks associated with owning and leasing substantial amounts of real estate.
 
We own or lease substantial amounts of real estate, primarily our retail stores and office facilities, and many of the stores we own are subject to ground leases or operating covenants. Accordingly, we are subject to all of the risks associated with owning and leasing real estate. In particular, the value of the relevant assets could decrease, or costs to operate stores could increase, in either case because of changes in the supply or demand of available store locations, demographic trends or the overall investment climate for real estate. Pursuant to the operating covenants in certain of our leases and due to the fact that we generally cannot cancel our leases at our option without incurring potentially significant exit costs, we could be

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required to continue to maintain, operate and make lease payments on a store that no longer meets our performance expectations, requirements or current operating strategies. The terms of our real estate leases, including renewal options, range from ten to 130 years. We believe that we have been able to lease real estate on favorable terms, but there is no guarantee that we will be able to continue to negotiate these terms in the future. If we are not able to enter into new leases or renew existing leases on terms acceptable to us, our business and results of operations could be adversely affected.
 
Our ability to timely deliver merchandise to our stores and customers is dependent on a limited number of distribution facilities. The loss of, or disruption in, one or more of our distribution facilities could adversely affect our business and operations.
 
We operate a limited number of distribution facilities. Our ability to meet the needs of our retail stores and online operations depends on the proper operation of these distribution facilities. Although we believe that we have appropriate contingency plans, unforeseen disruptions in operations due to freight difficulties, strikes, fire, weather conditions, natural disasters or for any other reason may result in the loss of inventory and/or delays in the delivery of merchandise to our stores and customers. In such an event, our customers may decide to purchase merchandise from our competitors instead of from us. In addition, we could incur higher costs and longer lead times associated with the distribution of our merchandise during the time it takes to reopen or replace a damaged facility. Any of the foregoing factors could adversely affect our business, financial condition and results of operations.
 
Our business may be adversely affected by catastrophic events and extreme or unseasonable weather conditions.
 
Unforeseen events, including war, terrorism and other international conflicts, public health issues and natural disasters such as earthquakes, hurricanes or tornadoes, whether occurring in the United States or abroad, could disrupt our supply chain operations, international trade or result in political or economic instability. Any of the foregoing events could result in property losses, reduce demand for our merchandise, impact our store operations or make it difficult or impossible to obtain merchandise from our suppliers.
 
Extreme weather conditions in the areas in which our stores are located, particularly in markets where we have multiple stores, could adversely affect our business. Heavy snowfall, rainfall or other extreme weather conditions over a prolonged period might make it difficult for our customers to travel to our stores and thereby reduce our revenues and profitability. During the first quarter of fiscal year 2018, Hurricane Harvey and Hurricane Irma significantly impacted our stores in Houston, Texas and in Florida, requiring these stores to close for several days at a time and impacting our customers’ ability and willingness to shop at those locations. Given the importance of these stores to our business, we expect these closures will negatively impact our results of operations for the first quarter of fiscal 2018. Our business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could render a portion of our inventory incompatible with those unseasonable conditions. Reduced sales from extreme or prolonged unseasonable weather conditions could adversely affect our business.

Our failure to comply with, or developments in, laws, rules or regulations could affect our business or results of operations.
 
We are subject to customs, anti-corruption laws, truth-in-advertising, intellectual property, labor and other laws, including consumer protection regulations, credit card regulations, environmental laws and zoning and occupancy ordinances that regulate retailers generally and/or govern the importation, promotion and sale of merchandise, regulate wage and hour matters with respect to our employees and govern the operation of our retail stores and warehouse facilities. Although we undertake to monitor our compliance with and developments in these laws, rules and regulations, if these laws are violated by us or our importers, designers, manufacturers, distributors or other business partners, or if the interpretation of these laws, rules or regulations changes, we could experience delays in shipments and receipt of merchandise, suffer damage to our reputation or be subject to fines or other penalties under the controlling regulations, any of which could adversely affect our business or results of operations. For a more detailed description of current lawsuits and other litigation to which we are party, see Item 3, "Legal Proceedings" and Note 12 of the Notes to Consolidated Financial Statements in Item 15.
 
If we are unable to enforce our intellectual property rights, if we are accused of infringing a third party’s intellectual property rights, or if the merchandise we purchase from vendors is alleged to have infringed a third party’s intellectual property rights, our business or results of operations may be adversely affected.
Our future success and competitive position depend in part on our ability to maintain and protect our brand. We and our subsidiaries currently own various intellectual property rights in the United States and in various foreign jurisdictions that differentiate us from our competitors, including our trademarks, tradenames and service marks, such as the “Neiman Marcus,” “Bergdorf Goodman” and “mytheresa” marks. We currently rely on a combination of copyright, trademark, trade dress and

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unfair competition laws to establish and protect our intellectual property and other proprietary rights, but the steps we take to protect such rights may be inadequate to prevent infringement of our trademarks and proprietary rights by others. Such unauthorized use of our trademarks, trade secrets, or other proprietary rights may cause significant damage to our brands and have an adverse effect on our business. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States and there can be no assurance that we are adequately protected in all countries or that we will prevail when defending our trademark or proprietary rights. The loss or reduction of any of our significant intellectual property or proprietary rights could have an adverse effect on our business.
Additionally, third parties may assert claims against us alleging infringement, misappropriation or other violations of their intellectual property or other proprietary rights, whether or not the claims have merit. Such claims could be time consuming and expensive to defend and may divert management’s attention and resources. This could have an adverse effect on our business or results of operations and cause us to incur significant litigation costs and expenses. In addition, resolution of such claims may require us to cease using the relevant intellectual property or other rights or selling the allegedly infringing products, or to license rights from third parties.
We purchase merchandise from vendors that may incorporate protected intellectual property and we do not independently investigate whether these vendors legally hold intellectual property rights to merchandise that they are manufacturing or distributing. As a result, we rely upon the vendors’ representations and indemnifications set forth in our purchase orders and supplier agreements concerning their right to sell us the products that we purchase from them. If a third party claims to have rights with respect to merchandise we purchased from a vendor, or if we acquire unlicensed merchandise, we could be obligated to remove such merchandise from our stores, incur costs associated with destruction of such merchandise if the distributor or vendor is unwilling or unable to reimburse us and be subject to liability under various civil and criminal causes of action, including actions to recover unpaid royalties and other damages and injunctions. Any of these results could harm our brand image and have a material adverse effect on our business and growth.
Our high level of fixed lease obligations could adversely affect our business, financial condition and results of operations.
Our high level of fixed lease obligations will require us to use a significant portion of cash generated by our operations to satisfy these obligations and could adversely affect our ability to obtain future financing to support our growth or other operational investments. We will require substantial cash flows from operations to make our payments under our operating leases, which in some cases provide for periodic adjustments in our rent rates. If we are not able to make the required payments under the leases, the owners of or lenders with a security interest in the relevant stores, distribution centers or administrative offices may, among other things, repossess those assets, which could adversely affect our ability to conduct our operations. In addition, our failure to make payments under our operating leases could trigger defaults under other leases or under agreements governing our indebtedness, which could cause the counterparties under those agreements to accelerate the obligations due thereunder.
Claims under our insurance plans and policies may differ from our estimates, which could adversely affect our results of operations.
We use a combination of insurance and self‑insurance plans to provide for potential liabilities for workers’ compensation, general liability, business interruption, property and directors’ and officers’ liability insurance, vehicle liability and employee health-care benefits. Our insurance coverage may not be sufficient, and any insurance proceeds may not be timely paid to us. In addition, liabilities associated with the risks that are retained by us are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions, and our business, financial condition and results of operations may be adversely affected if such assumptions are incorrect.

Risks Related to our Indebtedness
 
Our substantial indebtedness could adversely affect our business, financial condition and results of operations and our ability to fulfill our obligations with respect to such indebtedness.
 
As of July 29, 2017, the principal amount of our total indebtedness was approximately $4.8 billion, and we had unused commitments under our revolving credit facilities available to us of $651.1 million, subject to a borrowing base, of which (i) $90.0 million of such capacity is available to us subject to certain restrictions as more fully described in Note 8 of the Notes to Consolidated Financial Statements in Item 15 and (ii) $17.1 million of such capacity is available only to MyTheresa under its credit facilities and not to our U.S. operations.
 

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The existence and terms of our substantial indebtedness could adversely affect our business, financial condition and results of operations by:

making it more difficult for us to satisfy our obligations with respect to our indebtedness;
limiting our ability to incur, or guarantee, additional indebtedness or obtain additional financing to fund future working capital, capital expenditures, acquisitions, execution of our business and growth strategies or other general corporate requirements;
requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes and future growth;
limiting our ability to pay dividends or make other distributions in respect of, or repurchase or redeem, capital stock;
increasing our vulnerability to general adverse economic, industry and competitive conditions and government regulations;
exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our credit facilities, are at variable rates of interest;
limiting our flexibility in planning for and reacting to changes in the industry in which we compete and our ability to take advantage of new business opportunities;
placing us at a disadvantage compared to other, less leveraged competitors;
increasing our cost of borrowing; and
causing our suppliers or other parties with which we maintain business relationships to experience uncertainty about our future and seek alternative relationships with third parties or seek to alter their business relationships with us.
 
We may also incur substantial indebtedness in the future, subject to the restrictions contained in the indentures governing the Notes and the credit agreements governing our credit facilities. If such new indebtedness is in an amount greater than our current indebtedness levels, the related risks that we now face could intensify. However, we cannot assure you that any such additional financing will be available to us on acceptable terms or at all. See “—Our ability to obtain adequate financing or raise capital in the future may be limited.”
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and results of operations, which are subject to prevailing economic and competitive conditions and to financial, business, legislative, regulatory and other factors beyond our control. As a result, we cannot assure you that our business will generate a level of cash flows from operating activities sufficient to permit us to make payments on our indebtedness. 
    
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and may have to undertake alternative financing plans, such as refinancing or restructuring our indebtedness, selling our assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance our indebtedness or to raise additional capital will depend on the conditions of the capital markets and our financial condition at such time. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may also restrict us from adopting some of these alternatives.

If we cannot make scheduled payments on our debt, we will be in default and holders of the Notes and the lenders under our Senior Secured Credit Facilities (as defined below) could declare all outstanding principal and interest to be due and payable, the lenders under our Senior Secured Credit Facilities could terminate their commitments to loan additional money to us and we could be forced into bankruptcy or liquidation.

The occurrence of any of the foregoing would materially and adversely affect our business, financial position and results of operations. 

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Our debt agreements contain restrictions that may limit our flexibility in operating our business.
 
The indentures governing the Notes and the credit agreements governing our Senior Secured Credit Facilities contain, and any agreements governing future indebtedness will likely contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to engage in acts that may be in our long-term best interest, including restrictions on our and our subsidiaries' ability to:

incur additional indebtedness and guarantee indebtedness;
create liens;
make investments, loans or advances;
merge or consolidate;
sell assets, including capital stock of subsidiaries or make acquisitions;
pay dividends or make other distributions in respect of, or repurchase or redeem, capital stock;
prepay, redeem or repurchase certain indebtedness;
enter into transactions with affiliates; and
alter our lines of business.

In addition, the springing financial covenant in the credit agreement governing our asset-based revolving credit facility (the "Asset-Based Revolving Credit Facility") requires the maintenance of a minimum fixed charge coverage ratio, which covenant is triggered when excess availability under our Asset-Based Revolving Credit Facility is less than the greater of $50.0 million and 10% of the Line Cap (as defined in the credit agreement governing the Asset-Based Revolving Credit Facility) then in effect.  Our ability to meet the financial covenant could be affected by events beyond our control. Additional restrictions will apply if excess availability remains below the greater of $50.0 million and 10% of the Line Cap then in effect, including increased reporting requirements and additional administrative agent control rights over certain of our accounts.
 
A breach of the covenants under the indentures governing the Notes or under the credit agreements governing our Senior Secured Credit Facilities could result in an event of default under the applicable debt document.  Such a default, if not cured or waived, may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt that is subject to an applicable cross-acceleration or cross-default provision.  In addition, an event of default under the credit agreements governing our Senior Secured Credit Facilities would permit the lenders under our Senior Secured Credit Facilities to terminate all commitments to extend further credit under the facilities.  Furthermore, if we were unable to repay the amounts due and payable under our Senior Secured Credit Facilities, those lenders could proceed against the collateral granted to them to secure that indebtedness.  If our lenders or holders of the Notes accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness.
 
Based on the foregoing factors, the operating and financial restrictions and covenants in our current debt agreements and any future financing agreements could adversely affect our ability to finance future operations or capital needs or to engage in other business activities.

Our ability to obtain adequate financing or raise capital in the future may be limited.
Our business and operations may consume resources faster than we anticipate or generate less cash than we anticipate. To support our operating strategy, we must have sufficient capital to continue to make significant investments in our new and existing stores, online operations and advertising. While some of these investments can be financed with borrowings under our Asset-Based Revolving Credit Facility, the amount of such borrowings is limited to a periodic borrowing base valuation of our accounts receivable and domestic inventory and is therefore potentially subject to significant fluctuations, as well as certain discretionary rights of the administrative agent of our Asset-Based Revolving Credit Facility in respect of the calculation of such borrowing base value.
Since availability under our Asset-Based Revolving Credit Facility and/or cash generated by our operations may not be sufficient to allow us to fund our capital requirements in the future, we may need to raise additional funds through debt financing, the issuance of new equity or debt securities or a combination of both. Additional financing may not be available on favorable terms or at all.

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In addition, the credit and securities markets and the financial services industry have recently experienced disruption characterized by the bankruptcy, failure, collapse or sale of various financial institutions, increased volatility in securities prices, diminished liquidity and credit availability and intervention from the U.S. and other governments. Additionally, many retailers including some of our competitors have recently experienced or are currently experiencing financial difficulties, including several that have entered bankruptcy or have engaged in other debt restructuring activities. The cost and availability of credit has been and may continue to be adversely affected by these conditions. We cannot be certain that funding for our capital needs will be available from our existing financial institutions and the credit and securities markets if needed, and if available, to the extent required, and on acceptable terms.
The Asset-Based Revolving Credit Facility matures on July 25, 2021 (or July 25, 2020 if the Company’s obligations under its senior secured term loan facility have not been repaid or the maturity date thereof has not been extended to October 25, 2021 or later), the senior secured term loan facility (as amended, the "Senior Secured Term Loan Facility" and, together with the Asset-Based Revolving Credit Facility, the "Senior Secured Credit Facilities") matures on October 25, 2020, the 8.00% senior cash pay notes due 2021 (the "Cash Pay Notes") and the 8.75%/9.50% senior PIK toggle notes due 2021 (the "PIK Toggle Notes") mature on October 15, 2021, and the 7.125% senior debentures due 2028 (the "2028 Debentures" and, collectively with the Cash Pay Notes and the PIK Toggle Notes, the "Notes") mature on June 1, 2028. If we cannot renew or refinance the foregoing indebtedness upon their respective maturities or, more generally, obtain funding when needed, in each case on acceptable terms, we may be unable to continue to fund our capital requirements, which may have an adverse effect on our business, financial condition and results of operations.
A future lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital.
 
Our indebtedness currently has a non-investment grade rating, and any rating assigned could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes in our business, warrant.  Our indebtedness was downgraded twice by Standard & Poor’s and once by Moody’s during fiscal year 2017. Any additional downgrade by any ratings agency may increase the interest rate on our Senior Secured Credit Facilities, limit our access to vendor financing on favorable terms or otherwise result in higher borrowing costs, and likely would make it more difficult or more expensive for us to obtain additional debt financing.

We are a holding company with no operations and may not have access to sufficient cash to make payments on our outstanding indebtedness.
 
We are a holding company and do not have any direct operations. Our only significant assets are the equity interests we directly and indirectly hold in our subsidiaries.  As a result, we are dependent upon dividends and other payments from our subsidiaries to generate the funds necessary to meet our outstanding debt service and other obligations.  Our subsidiaries may not generate sufficient cash from operations to enable us to make principal and interest payments on our indebtedness.  In addition, our subsidiaries are separate and distinct legal entities and, except for our existing and future subsidiaries that will be the guarantors of our indebtedness, any payments on dividends, distributions, loans or advances to us by our subsidiaries could be subject to legal and contractual restrictions on dividends.  In addition, payments to us by our subsidiaries will be contingent upon our subsidiaries’ earnings.  Additionally, we may be limited in our ability to cause any future joint ventures to distribute their earnings to us.  Subject to certain qualifications, our subsidiaries are permitted under the terms of our indebtedness to incur additional indebtedness that may restrict payments from those subsidiaries to us.  There can be no assurance that agreements governing the current and future indebtedness of our subsidiaries will permit those subsidiaries to provide us with sufficient cash to fund payments of principal, premiums, if any, and interest on our indebtedness when due.  In the event that we do not receive distributions or other payments from our subsidiaries, we may be unable to make required payments on our debt.

Despite our level of indebtedness, we and our subsidiaries may still incur substantially more debt. This could further exacerbate the risks to our financial condition described above.
 
We and our subsidiaries may incur significant additional indebtedness in the future.  Although the indentures governing the Notes and the credit agreements governing our Senior Secured Credit Facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial.  As of July 29, 2017, our Asset-Based Revolving Credit Facility and our mytheresa.com credit facilities (the "mytheresa.com Credit Facilities") provide for borrowings of unused commitments of up to $651.1 million, subject to a borrowing base, of which (i) $90.0 million of such capacity is available to us subject to certain restrictions as more fully described in Note 8 of the Notes to Consolidated Financial Statements in Item 15 and (ii) $17.1 million of such capacity is available only to MyTheresa under its credit facilities

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and not to our U.S. operations. Additionally, (i) our Senior Secured Term Loan Facility may be increased by an amount equal to (x) $650.0 million plus (y) an unlimited amount so long as, in the case of new indebtedness secured on a pari passu basis with our Senior Secured Term Loan Facility, on a pro forma basis our maximum senior secured first lien net leverage ratio, as defined in the credit agreement governing the Senior Secured Term Loan Facility, does not exceed 4.25 to 1.00, and in the case of new indebtedness secured on a junior basis to our Senior Secured Term Loan Facility, subordinated in right of payment to our Senior Secured Term Loan Facility or, in the case of certain incremental equivalent loan debt, unsecured and pari passu in right of payment with our Senior Secured Term Loan Facility, on a pro forma basis our maximum total net leverage ratio, as defined in the credit agreement governing the Senior Secured Term Loan Facility, does not exceed 7.00 to 1.00, in each case subject to certain conditions, and (ii) our Asset-Based Revolving Credit Facility can be increased by up to $200.0 million.  If new debt is added to our current debt levels, the related risks that we and the guarantors now face would increase.  See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
The amount of borrowings permitted under our Asset-Based Revolving Credit Facility may fluctuate significantly, which may adversely affect our liquidity, results of operations and financial position.
 
The amount of borrowings permitted at any time under our Asset-Based Revolving Credit Facility is limited to a periodic borrowing base valuation of our accounts receivable and domestic inventory. As a result, our access to credit under our Asset-Based Revolving Credit Facility is potentially subject to significant fluctuations depending on the value of the borrowing base eligible assets as of any measurement date, as well as certain discretionary rights of the administrative agent of our Asset-Based Revolving Credit Facility in respect of the calculation of such borrowing base value.  Our inability to borrow under or the early termination of our Asset-Based Revolving Credit Facility may adversely affect our liquidity, results of operations and financial position.

We have elected in the past, and may elect in the future, to pay interest on the PIK Toggle Notes in the form of PIK Interest or partial PIK Interest rather than in the form of Cash Interest, which would increase the aggregate principal amount of our outstanding indebtedness.
 
The indenture governing the PIK Toggle Notes allows us to elect to pay either 50% or all of the interest due on the PIK Toggle Notes for such period in PIK Interest (as defined below) by either increasing the principal amount of the outstanding PIK Toggle Notes or by issuing new PIK Toggle Notes for the entire amount of the interest payment, thereby increasing the aggregate principal amount of the PIK Toggle Notes.  For the interest period commencing on April 15, 2017 and continuing through October 14, 2017, we elected to pay interest in the form of PIK Interest at a higher rate of 9.50% rather than making such interest payment in cash, which will result in the issuance of $28.5 million of additional PIK Toggle Notes in October 2017. We intend to elect to pay interest in the form of PIK Interest or partial PIK Interest on our semi-annual interest payment due in April 2018 and may additionally elect to do so with respect to the payment due in October 2018.  If we elect PIK Interest or partial PIK Interest with respect to these interest payments, we would accrue interest at a higher rate than the cash-pay portion of the PIK Toggle Notes, which would increase the aggregate principal amount of the outstanding PIK Toggle Notes, which in turn would further increase our substantial indebtedness. See “—Our substantial indebtedness could adversely affect our business, financial condition and results of operations and our ability to fulfill our obligations with respect to such indebtedness,” and see Note 8 of the Notes to Consolidated Financial Statements in Item 15 for a further description of the terms of the PIK Toggle Notes.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
 
Borrowings under our Senior Secured Credit Facilities are at variable rates of interest and expose us to interest rate risk.  We have hedged a portion of our variable rate debt obligations against interest rate fluctuations by using standard hedging instruments, but we are not required to do so and may not continue to do so in the future. Interest rates are currently at historically low levels.  If interest rates increase and we are unable to effectively hedge our interest rate risk, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed may remain the same, and our net earnings and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Assuming all revolving loans are fully drawn (and to the extent that LIBOR is in excess of the 1.00% floor rate with respect to our Senior Secured Term Loan Facility), each quarter point change in interest rates would result in a $5.8 million change in annual interest expense on the indebtedness under our Senior Secured Credit Facilities, taking into account the effect of existing interest rate hedging arrangements.  To reduce interest rate volatility, we have entered into interest rate swaps that involve the exchange of floating for fixed rate interest payments on a portion of our floating rate indebtedness from December 2016 through October 2020. However, we are exposed to interest rate risk for the portion of our variable rate indebtedness not covered by those swap agreements. Additionally, such hedging arrangements may not fully mitigate our interest rate risk and may subject us to mark-to-market losses when they are adjusted to reflect changes in fair value from time to time in accordance with accounting rules.

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We are controlled by the Sponsors, whose interests as equity holders may conflict with those of the lenders under our Senior Secured Credit Facilities and the holders of the Notes.
 
We are controlled by the Sponsors.  The Sponsors control the election of a majority of our directors and thereby have the power to control our affairs and policies, including the appointment of management, the issuance of additional stock and the declaration and payment of dividends.  The Sponsors do not have any liability for any obligations under our indebtedness and their interests may be in conflict with those of the lenders under our Senior Secured Credit Facilities and the holders of the Notes.  For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the Sponsors may pursue strategies that favor equity investors over debt investors.  Our equity holders may have an interest in pursuing acquisitions, divestitures, financing or other transactions that, in their judgment, could enhance the value of their equity investments, even though such transactions may involve risk to holders of our debt.  Additionally, the Sponsors may make investments in businesses that directly or indirectly compete with us, or may pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. 


ITEM 1B.     UNRESOLVED STAFF COMMENTS
 
None.

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ITEM 2.     PROPERTIES
 
Our main corporate headquarters are located at the Neiman Marcus store location in downtown Dallas, Texas.  Other operating headquarters are located in another location in Dallas, Texas, New York, New York and Munich, Germany.
 
Properties that we use in our operations include Neiman Marcus stores, Bergdorf Goodman stores, Last Call stores, and distribution, support and office facilities. As of October 3, 2017, the approximate aggregate square footage of the properties used in our operations was as follows:
 
Owned
 
Owned
Subject
to Ground
Lease
 
Leased
 
Total
Neiman Marcus Stores
856,000

 
2,329,000

 
2,411,000

 
5,596,000

Bergdorf Goodman Stores

 

 
316,000

 
316,000

Last Call Stores and Other

 

 
972,000

 
972,000

Distribution, Support and Office Facilities
1,330,000

 
150,000

 
1,638,000

 
3,118,000

 
Neiman Marcus Stores.  As of October 3, 2017, we operated 42 Neiman Marcus stores, with an aggregate total property size of approximately 5,596,000 square feet.  The following table sets forth certain details regarding each Neiman Marcus store:
Locations
 
Fiscal Year
Operations
Began
 
Gross
Store
Sq. Feet
 
Locations
 
Fiscal Year
Operations
Began
 
Gross
Store
Sq. Feet
Dallas, Texas (Downtown)(1)*
 
1908
 
129,000

 
Denver, Colorado(3)
 
1991
 
90,000

Dallas, Texas (NorthPark)(2)
 
1965
 
218,000

 
Scottsdale, Arizona(2)
 
1992
 
114,000

Houston, Texas (Galleria)(3)
 
1969
 
224,000

 
Troy, Michigan(3)
 
1993
 
157,000

Bal Harbour, Florida(2)
 
1971
 
97,000

 
Short Hills, New Jersey(3)
 
1996
 
137,000

Atlanta, Georgia(2)
 
1973
 
206,000

 
King of Prussia, Pennsylvania(3)
 
1996
 
145,000

St. Louis, Missouri(2)
 
1975
 
145,000

 
Paramus, New Jersey(3)
 
1997
 
141,000

Northbrook, Illinois(2)
 
1976
 
144,000

 
Honolulu, Hawaii(3)
 
1999
 
181,000

Fort Worth, Texas(2)
 
1977
 
92,000

 
Palm Beach, Florida(2)
 
2001
 
53,000

Washington, D.C.(2)
 
1978
 
130,000

 
Plano, Texas (Willow Bend)(4)*
 
2002
 
156,000

Newport Beach, California(3)
 
1978
 
153,000

 
Tampa, Florida(3)
 
2002
 
96,000

Beverly Hills, California(1)*
 
1979
 
185,000

 
Coral Gables, Florida(2)
 
2003
 
136,000

Westchester, New York(2)
 
1981
 
138,000

 
Orlando, Florida(4)*
 
2003
 
95,000

Las Vegas, Nevada(2)
 
1981
 
174,000

 
San Antonio, Texas(4)
 
2006
 
120,000

Oak Brook, Illinois(2)
 
1982
 
98,000

 
Boca Raton, Florida(2)
 
2006
 
136,000

San Diego, California(2)
 
1982
 
106,000

 
Charlotte, North Carolina(3)
 
2007
 
80,000

Fort Lauderdale, Florida(3)
 
1983
 
92,000

 
Austin, Texas(3)
 
2007
 
80,000

San Francisco, California(4)*
 
1983
 
252,000

 
Natick, Massachusetts(4)*
 
2008
 
103,000

Chicago, Illinois (Michigan Ave.)(2)
 
1984
 
188,000

 
Woodland Hills, California(3)
 
2009
 
120,000

Boston, Massachusetts(2)
 
1984
 
111,000

 
Bellevue, Washington(2)
 
2010
 
125,000

Palo Alto, California(3)
 
1986
 
120,000

 
Walnut Creek, California(3)
 
2012
 
88,000

McLean, Virginia(4)
 
1990
 
130,000

 
Garden City, New York(3)
 
2016
 
111,000

 
(1)           Owned subject to partial ground lease.
(2)           Leased.
(3)           Owned buildings on leased land.
(4)           Owned.
*              Mortgaged to secure our Senior Secured Credit Facilities and the 2028 Debentures.


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Bergdorf Goodman Stores.  We operate two Bergdorf Goodman stores, both of which are located in Manhattan at 58th Street and Fifth Avenue. The following table sets forth certain details regarding these stores:
Locations
 
Fiscal Year
 Operations
 Began
 
Gross Store
 Sq. Feet
New York City (Main)(1)
 
1901
 
250,000

New York City (Men’s)(1)
 
1991
 
66,000

 
(1)           Leased.
 
Last Call Stores.  As of October 3, 2017, we operated 38 Last Call stores in 14 states that average approximately 24,000 square feet each in size. During fiscal year 2017, we began a process to assess our Last Call footprint and closed four of our Last Call stores. On September 12, 2017, we announced that we will be closing ten additional Last Call stores in fiscal year 2018 in order to optimize our Last Call store portfolio. We will continue to evaluate our off-price business and seek to optimize the operations of Last Call in the future.
 
Distribution, Support and Office Facilities.  We own approximately 41 acres of land in Longview, Texas, where our primary distribution facility is located.  The 612,000 square foot Longview facility is the principal merchandise processing and distribution facility for Neiman Marcus stores.  In fiscal year 2013, we opened a 198,000 square foot distribution facility in Pittston, Pennsylvania to support the future growth and initiatives of the Company.  We lease three regional service centers in New York, Florida and California.
 
We also own approximately 50 acres of land in Irving, Texas, where our online operating headquarters and distribution facility are located.  In addition, we currently lease another regional distribution facility in Dallas, Texas to support our online operations. We also lease a 182,000 square foot facility outside of Munich, Germany to support our MyTheresa operations.
 
Lease Terms.  We lease a significant percentage of our stores and, in certain cases, the land upon which our stores are located.  The terms of these leases, assuming all outstanding renewal options are exercised, range from ten to 130 years.  The lease on the Bergdorf Goodman Main Store expires in 2050, with no renewal options, and the lease on the Bergdorf Goodman Men’s Store expires in 2020, with a ten-year renewal option.  Most leases provide for fixed monthly rentals or contingent rentals based upon revenues in excess of stated amounts and normally require us to pay real estate taxes, insurance, common area maintenance costs and other occupancy costs.
 
For further information on our properties and lease obligations, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 12 of the Notes to Consolidated Financial Statements in Item 15. 


ITEM 3.     LEGAL PROCEEDINGS
 
Information for this item is included in Note 12 of the Notes to Consolidated Financial Statements in Item 15, and incorporated herein by reference.     


ITEM 4.          MINE SAFETY DISCLOSURES
 
Not applicable.


PART II


ITEM 5.                            MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information

Subsequent to the Acquisition and the Conversion, our membership unit is privately held and there is no established public trading market for such unit.


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Dividends

We do not currently intend to pay any dividends, distributions or other similar payments on our membership unit in the foreseeable future. Instead, we currently intend to use all of our earnings for the operation and growth of our business and the repayment of indebtedness.

We did not declare or pay any dividends, distributions or other amounts on our membership unit in fiscal year 2017 or 2016.


ITEM 6.     SELECTED FINANCIAL DATA
 
The following selected financial data is qualified in entirety by our Consolidated Financial Statements and the related notes thereto contained in Item 15 and should be read in conjunction with "Business" in Item 1, "Risk Factors" in Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7. Our historical results are not necessarily indicative of results for any future period and results of operations for interim periods are not necessarily indicative of the results that might be expected for any other interim period or for an entire year.

 
Fiscal year ended
 
Thirty-nine
weeks ended
 
 
Thirteen
weeks ended
 
Fiscal year ended
 
July 29,
2017
 
July 30,
2016
 
August 1,
2015
 
August 2,
2014
 
 
November 2,
2013
 
August 3,
2013 (1)
(in millions, except per share data)
(Successor)
 
(Successor)
 
(Successor)
 
(Successor)
 
 
(Predecessor)
 
(Predecessor)
OPERATING RESULTS DATA
 
 
 
 
 
 
 

 
 
 

 
 

Revenues
$
4,706.0

 
$
4,949.5

 
$
5,095.1

 
$
3,710.2

 
 
$
1,129.1

 
$
4,648.2

Cost of goods sold including buying and occupancy costs (excluding depreciation)
3,220.0

 
3,322.5

 
3,305.5

 
2,563.0

 
 
685.4

 
2,995.4

Selling, general and administrative expenses (excluding depreciation)
1,129.3

 
1,117.9

 
1,162.1

 
835.0

 
 
266.4

 
1,047.8

Income from credit card program
(60.1
)
 
(60.6
)
 
(52.8
)
 
(40.7
)
 
 
(14.7
)
 
(53.4
)
Depreciation and amortization (2)
329.5

 
338.1

 
322.8

 
262.0

 
 
46.0

 
188.9

Impairment charges (3)
510.7

 
466.2

 

 

 
 

 

Operating earnings (loss)
(453.2
)
 
(261.7
)
 
318.0

 
8.8

 
 
32.1

 
446.4

Net earnings (loss)
$
(531.8
)
 
$
(406.1
)
 
$
14.9

 
$
(134.1
)
 
 
$
(13.1
)
 
$
163.7

 
BALANCE SHEET DATA (at period end)
 
 
 
 
 
 
 

 
 
 
 
 

Total assets
$
7,703.5

 
$
8,256.9

 
$
8,719.8

 
$
8,574.9

 
 
 
 
$
5,247.9

Total liabilities
7,236.9

 
7,313.8

 
7,306.0

 
7,142.3

 
 
 
 
4,416.9

Long-term debt, net of debt issuance costs (excluding current maturities)
$
4,675.5

 
$
4,584.3

 
$
4,556.0

 
$
4,432.8

 
 
 
 
$
2,672.4



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Fiscal year ended
 
Thirty-nine
weeks ended
 
 
Thirteen
weeks ended
 
Fiscal year ended
 
July 29,
2017
 
July 30,
2016
 
August 1,
2015
 
August 2,
2014
 
 
November 2,
2013
 
August 3,
2013 (1)
(dollars in millions, except sales per square foot)
(Successor)
 
(Successor)
 
(Successor)
 
(Successor)
 
 
(Predecessor)
 
(Predecessor)
OTHER DATA
 
 
 
 
 
 
 

 
 
 

 
 

Change in comparable revenues (4)
(5.2
)%
 
(4.1
)%
 
3.9
%
 
5.4
%
 
 
5.7
%
 
4.9
%
Number of full-line stores open at period end
44

 
44

 
43

 
43

 
 
43

 
43

Sales per square foot (5)
$
505

 
$
548

 
$
590

 
$
440

 
 
$
138

 
$
552

Percentage of revenues transacted online
31.3
 %
 
29.0
 %
 
26.3
%
 
24.6
%
 
 
21.4
%
 
22.2
%
 
 
 
 
 
 
 
 

 
 
 

 
 

Adjusted EBITDA (6)
$
433.8

 
$
584.9

 
$
710.6

 
$
501.3

 
 
$
197.2

 
$
682.7

Adjusted EBITDA as a percentage of revenues
9.2
 %
 
11.8
 %
 
13.9
%
 
13.5
%
 
 
17.5
%
 
14.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures (7)
204.6

 
$
301.4

 
$
270.5

 
$
138.0

 
 
$
36.0

 
$
146.5

Depreciation expense
225.5

 
226.9

 
185.6

 
113.3

 
 
34.2

 
141.5

Rent expense and related occupancy costs
116.1

 
119.4

 
117.1

 
79.6

 
 
24.1

 
96.7

 

(1)
Fiscal year 2013 consists of the fifty-three weeks ended August 3, 2013. All other fiscal years consist of fifty-two weeks.

(2)
Amounts include incremental depreciation expense arising from fair value adjustments recorded in connection with purchase accounting.

(3)
Based upon our assessment of economic conditions in fiscal year 2017 and fiscal year 2016, our expectations of future business conditions and trends, our projected revenues, earnings and cash flows as well as other market factors such as the weighted average cost of capital and valuation multiples, we determined certain of our tradenames, goodwill and long-lived assets to be impaired and recorded impairment charges in fiscal year 2017 aggregating $510.7 million and in fiscal year 2016 aggregating $466.2 million.

(4)
Comparable revenues include (i) revenues derived from our retail stores open for more than fifty-two weeks, including stores that have been relocated or expanded, and (ii) revenues from our online operations.  Comparable revenues exclude revenues of (i) closed stores and (ii) designer websites created and operated pursuant to contractual arrangements with certain designer brands that had expired by the first quarter of fiscal year 2015. As MyTheresa was acquired in October 2014, comparable revenues for fiscal year 2015 exclude revenues from MyTheresa.  Comparable revenues for fiscal year 2016 include revenues from MyTheresa beginning in the second quarter of fiscal year 2016. The calculation of the change in comparable revenues for fiscal year 2013 is based on revenues for the fifty-two weeks ended July 27, 2013 compared to revenues for the fifty-two weeks ended July 28, 2012.

(5)
Sales per square foot are calculated as revenues of our Neiman Marcus and Bergdorf Goodman full-line stores for the applicable period divided by weighted average square footage.  Weighted average square footage includes a percentage of period-end square footage for new and closed stores equal to the percentage of the period during which they were open.  The calculation of sales per square foot for fiscal year 2013 is based on revenues for the fifty-two weeks ended July 27, 2013.

(6)
For an explanation of Adjusted EBITDA as a measure of our operating performance and a reconciliation to net earnings (loss), see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Non-GAAP Financial Measures.”

(7)
Amounts represent gross capital expenditures and exclude developer contributions of $37.4 million, $38.3 million, $34.7 million, $5.7 million, $0.0 million and $7.2 million, respectively, for the periods presented.

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ITEM 7.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes contained in Item 15.  Unless otherwise specified, the meanings of all defined terms in Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are consistent with the meanings of such terms as defined in the Notes to Consolidated Financial Statements in Item 15.  This discussion contains forward-looking statements.  Please see “Special Note Regarding Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions relating to our forward-looking statements.
 
Overview

Neiman Marcus Group LTD LLC (the "Company") is a luxury omni-channel retailer conducting store and online operations principally under the Neiman Marcus, Bergdorf Goodman, Last Call and MyTheresa brand names.  References to “we,” “our” and “us” are used to refer to the Company or collectively to the Company and its subsidiaries, as appropriate to the context. The Company is a subsidiary of Mariposa Intermediate Holdings LLC ("Holdings"), which in turn is a subsidiary of Neiman Marcus Group, Inc., a Delaware corporation ("Parent"). Parent is owned by entities affiliated with Ares Management, L.P. and Canada Pension Plan Investment Board (together, the "Sponsors") and certain co-investors. The Company's operations are conducted through its direct wholly owned subsidiary, The Neiman Marcus Group LLC ("NMG"). The Sponsors acquired the Company on October 25, 2013 (the "Acquisition"). Prior to the Acquisition, we were owned by Newton Holding, LLC, which was controlled by investment funds affiliated with TPG Global, LLC (collectively with its affiliates, "TPG") and Warburg Pincus LLC (together with TPG, the "Former Sponsors").

We conduct our specialty retail store and online operations on an omni-channel basis. As our store and online operations have similar economic characteristics, products, services and customers, our operations constitute a single omni-channel reportable segment.

Our fiscal year ends on the Saturday closest to July 31.  Like many other retailers, we follow a 4-5-4 reporting calendar, which means that each fiscal quarter consists of thirteen weeks divided into periods of four weeks, five weeks and four weeks.  All references to (i) fiscal year 2017 relate to the fifty-two weeks ended July 29, 2017, (ii) fiscal year 2016 relate to the fifty-two weeks ended July 30, 2016 and (iii) fiscal year 2015 relate to the fifty-two weeks ended August 1, 2015. References to fiscal year 2014 and years preceding and fiscal year 2018 and years thereafter relate to our fiscal years for such periods.

Certain financial information of the Company and its subsidiaries is presented on a consolidated basis and is presented as "Predecessor" or "Successor" to indicate whether it relates to the period preceding the Acquisition or the period succeeding the Acquisition, respectively. The Acquisition and the allocation of the purchase price were recorded for accounting purposes as of November 2, 2013, the end of our first quarter of fiscal year 2014.

In connection with the Acquisition, the Company incurred substantial new indebtedness, in part in replacement of former indebtedness. See “Liquidity and Capital Resources.” In addition, the purchase price paid in connection with the Acquisition was allocated to state the acquired assets and liabilities at fair value. The purchase accounting adjustments increased the carrying value of our property and equipment and inventory, revalued our intangible assets related to our tradenames, customer lists and favorable lease commitments and revalued our long-term benefit plan obligations, among other things. As a result, the Successor financial information subsequent to the Acquisition is not necessarily comparable to the Predecessor financial information.

Certain amounts presented in tables are subject to rounding adjustments and, as a result, the totals in such tables may not sum.

Investments and Strategic Initiatives

We are investing in strategies to grow our revenues and profits. Strategies we have pursued and continue to pursue include:

We are investing in technology to enhance the customer shopping experiences in both our online and store operations, including the launch of NMG One in fiscal year 2017. NMG One is an integrated merchandising and distribution system designed to enable us to purchase, share, manage and sell our inventories across our omni-channel operations and brands more efficiently;

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We are making capital investments to remodel our existing stores as well as to open new stores in select markets such as Garden City, New York (opened in February 2016), Fort Worth, Texas (opened in February 2017) and New York City (currently scheduled to open in fiscal year 2019);
We are re-engineering our costs to optimize our resources and organizational processes through a comprehensive review project we refer to as "Organizing for Growth". In connection with Organizing for Growth, we eliminated approximately 315 positions in fiscal year 2017 and approximately 500 positions in fiscal year 2016 across our stores, divisions and facilities; and
We have expanded our international footprint by acquiring MyTheresa in October 2014.
    
These issues also affected our financial reporting processes and required us to apply supplemental and manual controls to provide adequate control over financial reporting. See Item 9A. "Controls and Procedures — Changes in Internal Control over Financial Reporting."

Summary of Results of Operations
 
A summary of our results of operations is as follows:
 
Revenues — Our revenues for fiscal year 2017 were $4,706.0 million, a decrease of 4.9% from $4,949.5 million in fiscal year 2016. Comparable revenues for fiscal year 2017 decreased 5.2% compared to fiscal year 2016. In fiscal year 2017, revenues generated by our online operations were $1,471.7 million, or 31.3% of consolidated revenues. Comparable revenues from our online operations in fiscal year 2017 increased 2.5% from fiscal year 2016.
        
Changes in comparable revenues by quarter in fiscal year 2017 were:
Fiscal year 2017
 
 
Fourth quarter
 
(0.5
)%
Third quarter
 
(4.9
)
Second quarter
 
(6.8
)
First quarter
 
(8.0
)

We believe the lower levels of revenues in fiscal year 2017 were impacted by a number of factors, including:

the volatility and uncertainty in domestic and global economic conditions and the resulting impact on the market for luxury merchandise;
the strength of the U.S. dollar against international currencies, most notably the Euro and British pound, and a resulting impact on tourism and spending by international customers in the U.S.;
a significant and sustained decline in the global price for crude oil and the resulting impact on stakeholders in the oil and gas industries, particularly in the Texas markets in which we have a significant presence; and
implementation and conversion issues related to NMG One, which prevented us from fulfilling certain customer demand both in our stores and websites.

Cost of Goods Sold Including Buying and Occupancy Costs (Excluding Depreciation) ("COGS") — Compared to fiscal year 2016, COGS as a percentage of revenues increased 130 basis points in fiscal year 2017. The increase in COGS, as a percentage of revenues, was primarily attributable to:

decreased product margins due primarily to:
higher markdowns and promotional costs incurred on lower than expected revenues; and
higher delivery and processing costs; and
the deleveraging of buying and occupancy costs.

At July 29, 2017, consolidated inventories totaled $1,153.7 million, a 2.5% increase from July 30, 2016. Merchandise inventories supporting our U.S. operations increased 0.4% and merchandise inventories supporting

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our MyTheresa operations increased 38.1% from the prior fiscal year. We have and will continue to work aggressively to align our inventory levels and purchases with anticipated future customer demand. 

Selling, General and Administrative Expenses (Excluding Depreciation) ("SG&A") — Compared to fiscal year 2016, SG&A as a percentage of revenues increased 140 basis points in fiscal year 2017. The higher levels of SG&A expenses, as a percentage of revenues, were primarily attributable to:

the deleveraging of a significant portion of our SG&A expenses, primarily payroll and benefits;
higher levels of expenses and other costs incurred in connection with:
(i) investments in technology, (ii) the growth of our international footprint through MyTheresa and (iii) costs related to the opening of new stores and the remodeling of existing stores; and
certain corporate expenses, primarily professional fees;
lower favorable non-cash adjustments to the required liability for stock option awards requiring variable accounting; and
higher credit card chargebacks and other fees.
Impairment Charges — Based upon (i) the continuation of adverse economic and business trends, (ii) revisions to our anticipated future operating results and (iii) increases in the weighted average cost of capital used in estimating the fair value of our tradenames and our reporting units under a discounted cash flow model, we determined certain of our tradenames, goodwill, and long-lived assets to be impaired and recorded impairment charges aggregating $510.7 million in fiscal year 2017 and $466.2 million in fiscal year 2016.

Liquidity — At July 29, 2017, we had outstanding revolving credit facilities aggregating $917.1 million consisting of (i) our Asset-Based Revolving Credit Facility of $900.0 million in the U.S. and (ii) the mytheresa.com Credit Facilities of $17.1 million, or €15.0 million. Pursuant to these credit facilities, we had outstanding borrowings of $263.0 million, all of which represents borrowings under our Asset-Based Revolving Credit Facility, and outstanding letters of credit and guarantees of $3.0 million as of July 29, 2017. Our borrowings under these credit facilities fluctuate based on our seasonal working capital requirements, which generally peak in our first and third quarters. At July 29, 2017, we had unused borrowing commitments aggregating $651.1 million, subject to a borrowing base, of which (i) $90.0 million of such capacity is available to us subject to certain restrictions as more fully described in Note 8 of the Notes to Consolidated Financial Statements in Item 15 and (ii) $17.1 million of such capacity is available only to MyTheresa and not to our U.S. operations. Additionally, we held cash and cash equivalents and credit card receivables of $88.1 million bringing our available liquidity to $739.2 million at July 29, 2017, inclusive of the amount available to MyTheresa. We believe that cash generated from our operations along with our existing cash balances and available sources of financing will enable us to meet our anticipated cash obligations during the next 12 months.

Outlook — Economic conditions in the luxury retail industry have been and will continue to be impacted by a number of factors, including the rate of economic growth, the volatility and uncertainty in domestic and global economic and political conditions, fluctuations in the exchange rate of the U.S. dollar against international currencies, most notably the Euro and British pound, fluctuations in crude oil and fuel prices, uncertainty regarding governmental spending and tax policies and overall consumer confidence. We believe such factors negatively impacted our operations in fiscal years 2017 and 2016 and may continue to have an adverse impact on our future results of operations. As a result, we intend to operate our business and manage our cash requirements in a way that balances these economic conditions and current business trends with our long-term initiatives and growth strategies.

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Results of Operations
 
Performance Summary
 
The following table sets forth certain items expressed as percentages of revenues for the periods indicated:
 
 
Fiscal year ended
 
 
July 29,
2017
 
July 30,
2016
 
August 1,
2015
 
 
 
 
 
 
 
Revenues
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
68.4

 
67.1

 
64.9

Selling, general and administrative expenses (excluding depreciation)
 
24.0

 
22.6

 
22.8

Income from credit card program
 
(1.3
)
 
(1.2
)
 
(1.0
)
Depreciation expense
 
4.8

 
4.6

 
3.6

Amortization of intangible assets
 
1.1

 
1.2

 
1.6

Amortization of favorable lease commitments
 
1.1

 
1.1

 
1.1

Other expenses
 
0.6

 
0.5

 
0.8

Impairment charges
 
10.9

 
9.4

 

Operating earnings (loss)
 
(9.6
)
 
(5.3
)
 
6.2

Interest expense, net
 
6.3

 
5.8

 
5.7

Earnings (loss) before income taxes
 
(15.9
)
 
(11.1
)
 
0.6

Income tax expense (benefit)
 
(4.6
)
 
(2.9
)
 
0.3

Net earnings (loss)
 
(11.3
)%
 
(8.2
)%
 
0.3
 %

Set forth in the following table is certain summary information with respect to our operations for the periods indicated:
 
 
Fiscal year ended
 
 
July 29,
2017
 
July 30,
2016
 
August 1,
2015
 
 
 
 
 
 
 
Change in comparable revenues (1)
 
 
 
 
 
Total revenues
 
(5.2
)%
 
(4.1
)%
 
3.9
%
Online revenues
 
2.5
 %
 
4.4
 %
 
13.0
%
 
 
 
 
 
 
 
Percentage of revenues transacted online
 
31.3
 %
 
29.0
 %
 
26.3
%
 
 
 
 
 
 
 
Store count
 
 

 
 
 
 

Neiman Marcus and Bergdorf Goodman full-line stores open at end of period
 
44

 
44

 
43

Last Call stores open at end of period
 
38

 
42

 
43

 
 
 
 
 
 
 
Sales per square foot (2)
 
$
505

 
$
548

 
$
590

 
 
 
 
 
 
 
Capital expenditures (3)
 
204.6

 
301.4

 
270.5

Depreciation expense
 
225.5

 
226.9

 
185.6

Rent expense and related occupancy costs
 
116.1

 
119.4

 
117.1

 
 
 
 
 
 
 
Non-GAAP financial measures
 
 
 
 
 
 
EBITDA (4)
 
$
(123.7
)
 
$
76.4

 
$
640.8

Adjusted EBITDA (4)
 
$
433.8

 
$
584.9

 
$
710.6

 
 
(1)
Comparable revenues include (i) revenues derived from our retail stores open for more than fifty-two weeks, including stores that have been relocated or expanded, and (ii) revenues from our online operations.  Comparable revenues exclude revenues of (i) closed stores and (ii) designer websites created and operated pursuant to contractual arrangements with certain designer brands that had expired by the first quarter of fiscal year 2015. As MyTheresa was acquired in October 2014, comparable revenues for fiscal year 2015 exclude revenues from MyTheresa. 

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Comparable revenues for fiscal year 2016 include revenues from MyTheresa beginning in the second quarter of fiscal year 2016.

(2)
Sales per square foot are calculated as revenues of our Neiman Marcus and Bergdorf Goodman full-line stores for the applicable period divided by weighted average square footage.  Weighted average square footage includes a percentage of period-end square footage for new and closed stores equal to the percentage of the period during which they were open.

(3)
Amounts represent gross capital expenditures and exclude developer contributions of $37.4 million, $38.3 million and $34.7 million, respectively, for the periods presented.

(4)
For an explanation of EBITDA and Adjusted EBITDA as measures of our operating performance and a reconciliation to net earnings (loss), see “—Non-GAAP Financial Measures.”
 
Key Factors Affecting Our Results
 
Revenues.  We generate our revenues from the sale of luxury merchandise. Components of our revenues include:
 
Sales of merchandise — Revenues are recognized at the later of the point-of-sale or the delivery of goods to the customer. Revenues are reduced when our customers return goods previously purchased. We maintain reserves for anticipated sales returns based primarily on our historical trends. Revenues exclude sales taxes collected from our customers.
Delivery and processing — We generate revenues from delivery and processing charges related to certain merchandise deliveries to our customers.
 
Our revenues can be affected by the following factors:
 
general domestic and global economic and industry conditions, including inflation, deflation, changes related to interest rates and foreign currency exchange rates, rates of economic growth, current and expected unemployment levels and government fiscal and monetary policies;
the performance of the financial, equity and credit markets;
our ability to anticipate, identify and respond effectively to changing consumer demands, fashion trends and consumer shopping preferences and acquire goods meeting customers’ tastes and preferences;
consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt and consumer behaviors towards incurring and paying debt;
national and global geo-political uncertainty;
changes in the level of consumer spending generally and, specifically, on luxury goods;
the strength of the U.S. dollar against international currencies, most notably the Euro and British pound, and a resulting impact on tourism and spending by international customers in the U.S.;
a significant and sustained decline in the global price for crude oil and the resulting impact on stakeholders in the oil and gas industries, particularly in the Texas markets in which we have a significant presence;
changes in prices for commodities and energy, including fuel;
current and expected tax rates and policies;  
a material disruption in our information systems, or delays or difficulties in implementing or integrating new systems or enhancing or expanding current systems, or our failure to achieve the anticipated benefits of any new or updated information systems;
changes in the level of full-price sales; 
changes in the level and timing of promotional events conducted;
changes in the level of delivery and processing revenues collected from our customers; and
changes in the composition and the rate of growth of our sales transacted in store and online.
 

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In addition, our revenues are seasonal, as discussed below under “Seasonality.”
 
Cost of Goods Sold Including Buying and Occupancy Costs (Excluding Depreciation).  COGS consists of the following components:
 
Inventory costs — We utilize the retail inventory method of accounting. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are determined by applying a calculated cost-to-retail ratio, for various groupings of similar items, to the retail value of our inventories. The cost of the inventory reflected in the Consolidated Financial Statements is decreased by charges to cost of goods sold at average cost and the retail value of the inventory is lowered through the use of markdowns. Earnings are negatively impacted when merchandise is marked down. With the introduction of new fashions in the first and third fiscal quarters of each fiscal year and our emphasis on full-price selling in these quarters, a lower level of markdowns and higher margins are characteristic of these quarters. 
Inventory costs are also decreased by charges to cost of goods sold for estimates of shrinkage that has occurred between physical count dates.
Buying costs — Buying costs consist primarily of salaries and expenses incurred by our merchandising and buying operations. 
Occupancy costs — Occupancy costs consist primarily of rent, property taxes and operating costs of our retail, distribution and support facilities. A significant portion of our buying and occupancy costs are fixed in nature and are not dependent on the revenues we generate. 
Delivery and processing costs — Delivery and processing costs consist primarily of delivery charges we pay to third party carriers and other costs related to the fulfillment of customer orders not delivered at the point-of-sale.

Consistent with industry business practice, we receive allowances from certain of our vendors in support of the merchandise we purchase for resale. Certain allowances are received to reimburse us for markdowns taken or to support the gross margins that we earn in connection with the sales of the vendor’s merchandise. These allowances result in an increase to gross margin when we earn the allowances and they are approved by the vendor. Other allowances we receive represent reductions to the amounts we pay to acquire the merchandise. These allowances reduce the cost of the acquired merchandise and are recognized at the time the goods are sold. We received vendor allowances of $83.6 million, or 1.8% of revenues, in fiscal year 2017, $100.8 million, or 2.0% of revenues, in fiscal year 2016 and $94.8 million, or 1.9% of revenues, in fiscal year 2015. The amounts of vendor allowances we receive fluctuate based partially on the level of markdowns taken and did not have a significant impact on the year-over-year change in gross margin during fiscal years 2017, 2016 or 2015.
 
Changes in our COGS as a percentage of revenues can be affected by the following factors:
 
our ability to order an appropriate amount of merchandise to match customer demand and the related impact on the level of net markdowns and promotions costs incurred; 
customer acceptance of and demand for the merchandise we offer in a given season and the related impact of such factors on the level of full-price sales; 
factors affecting revenues generally, including pricing and promotional strategies, product offerings and actions taken by competitors; 
changes in delivery and processing costs and our ability to pass such costs on to our customers; 
changes in occupancy costs associated primarily with the opening of new stores or distribution facilities; and 
the amount of vendor reimbursements we receive during the reporting period.
 
Selling, General and Administrative Expenses (Excluding Depreciation).  SG&A consists principally of costs related to employee compensation and benefits in the selling and administrative support areas and advertising and marketing costs. A significant portion of our SG&A expenses is variable in nature and is dependent on the revenues we generate.
 
Advertising costs consist primarily of (i) online marketing costs, (ii) advertising costs incurred related to the production of the photographic content for our websites and (iii) costs incurred related to the production, printing and distribution of our print catalogs and other promotional materials mailed to our customers. Net marketing and advertising expenses were $183.0 million, or 3.9% of revenues, in fiscal year 2017, $178.9 million, or 3.6% of revenues, in fiscal year 2016 and $165.7 million, or 3.3% of revenues, in fiscal year 2015. The increase in net marketing and advertising expenses as

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a percentage of revenue of approximately 30 basis points in fiscal year 2017 from the prior year consisted of (i) approximately 10 basis points in support of our U.S. operations and (ii) approximately 20 basis points related to the expansion of our international footprint through MyTheresa.

We receive advertising allowances from certain of our merchandise vendors. Substantially all the advertising allowances we receive represent reimbursements of direct, specific and incremental costs that we incur to promote the vendor’s merchandise in connection with our various advertising programs, primarily catalogs and other print media and digital media. Advertising allowances fluctuate based on the level of advertising expenses incurred and are recorded as a reduction of our advertising costs when earned. Advertising allowances were approximately $50.1 million, or 1.1% of revenues, in fiscal year 2017, $54.8 million, or 1.1% of revenues, in fiscal year 2016 and $55.0 million, or 1.1% of revenues, in fiscal year 2015.
 
We also receive allowances from certain merchandise vendors in connection with compensation programs for employees who sell the vendor’s merchandise. These allowances are netted against the related compensation expenses that we incur. Amounts received from vendors related to compensation programs were $62.4 million, or 1.3% of revenues, in fiscal year 2017, $70.3 million, or 1.4% of revenues, in fiscal year 2016 and $76.4 million, or 1.5% of revenues, in fiscal year 2015.
 
Changes in our SG&A expenses are affected primarily by the following factors:
changes in the level of our revenues;
changes in the number of sales associates, which are due primarily to new store openings and expansion of existing stores, and the health care and related benefits expenses incurred as a result of such changes; 
changes in expenses incurred in connection with our advertising and marketing programs; and 
changes in expenses related to employee benefits due to general economic conditions such as rising health care costs.
 
Income From Credit Card Program.  We maintain a proprietary credit card program through which credit is extended to customers and have a related marketing and servicing alliance with affiliates of Capital One.  Pursuant to the Program Agreement, Capital One currently offers credit cards and non-card payment plans under both the "Neiman Marcus" and "Bergdorf Goodman" brand names.
 
We receive payments from Capital One based on sales transacted on our proprietary credit cards.  We recognize income from our credit card program when earned. In the future, the income from our credit card program may:

increase or decrease based upon the level of utilization of our proprietary credit cards by our customers; 
increase or decrease based upon the overall profitability and performance of the credit card portfolio due to the level of bad debts incurred or changes in interest rates, among other factors; 
increase or decrease based upon future changes to our credit card program in response to changes in regulatory requirements or other changes related to, among other things, the interest rates applied to unpaid balances and the assessment of late fees; and 
decrease based upon the level of future marketing and other services we provide to Capital One.

Additionally, beginning in July 2017, in accordance with the provisions of the credit card program agreement, our allocable share of the profits generated by the credit card portfolio was reduced as a result of our current credit ratings by S&P and Moody's.
 
Impairment of Indefinite-lived Intangible Assets, Goodwill and Long-lived Assets. We assess the recoverability of the carrying values of indefinite-lived intangible assets and goodwill as well as our store assets, consisting of property and equipment, customer lists and favorable lease commitments, annually in the fourth quarter of each fiscal year and upon the occurrence of certain events. These impairment assessments related to tradenames and goodwill are performed for three of our reporting units — Neiman Marcus, Bergdorf Goodman and MyTheresa.

Since fiscal year 2016, we have experienced declines in our operating results and we believe our operating results have been adversely impacted by a number of factors including, among other things:
    

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the volatility and uncertainty in domestic and global economic conditions and the resulting impact on the market for luxury merchandise;
the strength of the U.S. dollar against international currencies, most notably the Euro and British pound, and a resulting impact on tourism and spending by international customers in the U.S.; and
a significant and sustained decline in the global price for crude oil and the resulting impact on stakeholders in the oil and gas industries, particularly in the Texas markets in which we have a significant presence.
    
Based upon our assessment of economic conditions, our expectations of future business conditions and trends, our projected revenues, earnings, and cash flows as well as other market factors such as the weighted average cost of capital and valuation multiples, we determined that impairment charges were required to state certain of our intangible and long-lived assets to their estimated fair value.

We recorded impairment charges aggregating $466.2 million in fiscal year 2016. These impairment charges were driven primarily by revisions to our anticipated future operating trends in light of adverse economic and business trends existing as of the end of fiscal year 2016 and, to a lesser extent, increases in the weighted average cost of capital used in estimating the fair value of our tradenames and reporting units under a discounted cash flow method. These impairments related to certain of our tradenames, goodwill and long-lived assets primarily associated with our Neiman Marcus brand.

We recorded impairment charges aggregating $510.7 million in fiscal year 2017. These impairment charges were driven both by (i) changes in market conditions related to increases in the weighted average cost of capital and valuation multiples and (ii) further deterioration of operating trends during such periods. In fiscal year 2017, we recorded impairment charges of $153.8 million in the second quarter and $357.0 million in the fourth quarter. These impairment charges related to certain of our tradenames, goodwill and long-lived assets primarily associated with our Neiman Marcus and Bergdorf Goodman brands.

We continue to undertake initiatives to help drive revenues and streamline business activities and will continue to closely monitor our financial condition and results of operations. However, there is a risk that we may continue to experience challenging economic conditions and operating pressures, which in turn could increase the risk of additional impairment charges in future periods.

Effective Income Tax Rate. Our effective income tax rate may fluctuate from period to period due to a variety of factors, including changes in our assessment of certain tax contingencies, valuation allowances, changes in federal, state and foreign tax laws, outcomes of administrative audits, changes in our corporate structure, the impact of other discrete or non-recurring items and the mix of earnings among our U.S. and foreign operations, where the statutory rates are generally lower than in the United States. As a result, our effective income tax rate may vary significantly from the federal statutory tax rate.
Seasonality
 
We conduct our selling activities in two primary selling seasons—Fall and Spring. The Fall season is comprised of our first and second fiscal quarters and the Spring season is comprised of our third and fourth fiscal quarters.
 
Our first fiscal quarter is generally characterized by a higher level of full-price sales with a focus on the initial introduction of Fall season fashions. Marketing activities designed to stimulate customer purchases, a lower level of markdowns and higher margins are characteristic for this quarter. Our second fiscal quarter is more focused on promotional activities related to the December holiday season, the early introduction of resort season collections from certain designers and the sale of Fall season goods on a marked down basis. As a result, margins are typically lower in our second fiscal quarter. However, due to the seasonal increase in revenues that occurs during the holiday season, our second fiscal quarter is typically the quarter in which our revenues are the highest and in which expenses as a percentage of revenues are the lowest. Our working capital requirements are also the greatest in the first and second fiscal quarters as a result of higher seasonal requirements.
 
Our third fiscal quarter is generally characterized by a higher level of full-price sales with a focus on the initial introduction of Spring season fashions. Marketing activities designed to stimulate customer purchases, a lower level of markdowns and higher margins are again characteristic for this quarter. Revenues are generally the lowest in our fourth fiscal quarter with a focus on promotional activities offering Spring season goods to customers on a marked down basis, resulting in lower margins during the quarter. Our working capital requirements are typically lower in our third and fourth fiscal quarters compared to the other quarters.
 

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A large percentage of our merchandise assortment, particularly in the apparel, fashion accessories and shoe categories, is ordered months in advance of the introduction of such goods. For example, women’s apparel, men’s apparel, shoes and handbags are typically ordered six to nine months in advance of the products being offered for sale while jewelry and other categories are typically ordered three to six months in advance. As a result, our success depends in large part on our ability to anticipate and identify fashion trends and consumer shopping preferences and to identify and react effectively to rapidly changing consumer demands in a timely manner.
 
We monitor the sales performance of our inventories throughout each season. We seek to order additional goods to supplement our original purchasing decisions when the level of customer demand is higher than originally anticipated. However, in certain merchandise categories, particularly fashion apparel, our ability to purchase additional goods can be limited. This can result in lost sales opportunities in the event of higher than anticipated demand for the merchandise we offer or a higher than anticipated level of consumer spending. Conversely, in the event we buy merchandise that is not accepted by our customers or the level of consumer spending is less than we anticipated, we could incur a higher than anticipated level of markdowns, net of vendor allowances, resulting in lower operating profits. Any failure on our part to anticipate, identify and respond effectively to these changes could adversely affect our business, financial condition and results of operations.

Results of Operations for the Fiscal Year Ended July 29, 2017 Compared to the Fiscal Year Ended July 30, 2016
 
Revenues.  Our revenues for fiscal year 2017 of $4,706.0 million decreased by $243.5 million, or 4.9%, from $4,949.5 million in fiscal year 2016. Comparable revenues for fiscal year 2017 decreased 5.2% compared to fiscal year 2016.

Changes in comparable revenues by quarter were:
Fiscal year 2017
 
 
Fourth quarter
 
(0.5
)%
Third quarter
 
(4.9
)
Second quarter
 
(6.8
)
First quarter
 
(8.0
)

In fiscal year 2017, we generated negative comparable revenue increases. We believe the lower levels of revenues were impacted by a number of factors, including:

the volatility and uncertainty in domestic and global economic conditions and the resulting impact on the market for luxury merchandise;
the strength of the U.S. dollar against international currencies, most notably the Euro and British pound, and a resulting impact on tourism and spending by international customers in the U.S.;
a significant and sustained decline in the global price for crude oil and the resulting impact on stakeholders in the oil and gas industries, particularly in the Texas markets in which we have a significant presence; and
the implementation and conversion issues related to NMG One, which prevented us from fulfilling certain customer demand both in our stores and websites.

Revenues generated by our online operations in fiscal year 2017 were $1,471.7 million, or 31.3% of consolidated revenues. Comparable revenues from our online operations in fiscal year 2017 increased 2.5% from the prior fiscal year.

Cost of Goods Sold Including Buying and Occupancy Costs (Excluding Depreciation). COGS increased to 68.4% of revenues in fiscal year 2017 from 67.1% of revenues in fiscal year 2016. Compared to the prior year, COGS as a percentage of revenues increased by 130 basis points due primarily to:
    
decreased product margins of approximately 100 basis points due primarily to:
higher markdowns and promotional costs of approximately 70 basis points incurred on lower than expected revenues; and
higher delivery and processing costs of approximately 20 basis points; and
the deleveraging of buying and occupancy costs of approximately 30 basis points. 

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Selling, General and Administrative Expenses (Excluding Depreciation).  SG&A expenses as a percentage of revenues increased to 24.0% in fiscal year 2017 compared to 22.6% of revenues in fiscal year 2016. Compared to the prior year, SG&A as a percentage of revenues increased 140 basis points due primarily to:

the deleveraging of a significant portion of our SG&A expenses, primarily payroll and benefits, of approximately 50 basis points on the lower level of revenues;
higher levels of expenses and other costs of approximately 45 basis points incurred in connection with:
(i) investments in technology, (ii) the growth of our international footprint through MyTheresa and (iii) costs related to the opening of new stores and the remodeling of existing stores; and
certain corporate expenses, primarily professional fees;
lower favorable non-cash adjustments to the required liability for stock option awards requiring variable accounting of approximately 20 basis points; and
higher credit card chargebacks and other fees of approximately 15 basis points.
Income from Credit Card Program.  Income from our credit card program was $60.1 million, or 1.3% of revenues, in fiscal year 2017 compared to $60.6 million, or 1.2% of revenues, in fiscal year 2016.

Depreciation and Amortization Expenses.  Depreciation expense was $225.5 million, or 4.8% of revenues, in fiscal year 2017 compared to $226.9 million, or 4.6% of revenues, in fiscal year 2016.

Amortization of intangible assets (primarily customer lists and favorable lease commitments) was $104.0 million, or 2.2% of revenues, in fiscal year 2017 compared to $111.2 million, or 2.2% of revenues, in fiscal year 2016.

Other Expenses. Other expenses in fiscal year 2017 aggregated $29.7 million, or 0.6% of revenues, compared to $27.1 million, or 0.5% of revenues, in fiscal year 2016. Other expenses consisted of the following components:
 
 
Fiscal year ended
(in millions)
 
July 29,
2017
 
July 30,
2016
 
 

 

Expenses incurred in connection with strategic initiatives
 
$
21.3

 
$
24.3

MyTheresa acquisition costs
 
3.3

 
4.4

Expenses related to Cyber-Attack, net of insurance recoveries
 
1.5

 
1.0

Net gain from facility closure
 

 
(5.6
)
Other expenses
 
3.6

 
2.9

Total
 
$
29.7

 
$
27.1


We incurred professional fees and other costs aggregating $21.3 million in fiscal year 2017 and $24.3 million in fiscal year 2016 in connection with Organizing for Growth, NMG One and the evaluation of potential strategic alternatives. In connection with Organizing for Growth, we eliminated approximately 315 positions in fiscal year 2017 and approximately 500 positions in fiscal year 2016 across our stores, divisions and facilities. We incurred severance costs of $7.2 million in fiscal year 2017 and $10.2 million in fiscal year 2016.

In October 2014, we acquired MyTheresa, a luxury retailer headquartered in Munich, Germany. Acquisition costs consisted primarily of professional fees as well as adjustments of our earn-out obligations to estimated fair value at each reporting date. The final earn-out obligation was paid in March 2017.

We discovered in January 2014 that malicious software was clandestinely installed on our computer systems. In fiscal years 2017 and 2016, we incurred legal and other expenses in connection with the Cyber-Attack.

In the third quarter of fiscal year 2016, we recorded a $5.6 million net gain related to the closure and relocation of our regional service center in New York.

Impairment Charges. In fiscal year 2017, we assessed the recoverability of the carrying values of our indefinite-lived intangible assets and goodwill as well as our store assets as a result of (i) increases in the weighted average cost of capital used in estimating the fair value of our tradenames and our reporting units under a discounted cash flow model, (ii) the continuation of adverse economic and business trends and (iii) revisions to our anticipated future operating results. We

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recorded impairment charges of $510.7 million in fiscal year 2017 and $466.2 million in fiscal year 2016 to state certain of our intangible and long-lived assets, primarily related to our Neiman Marcus and Bergdorf Goodman brands, to their estimated fair value.
    
Operating Loss. We had operating losses of $453.2 million, or 9.6% of revenues, in fiscal year 2017 compared to operating losses of $261.7 million, or 5.3% of revenues, in fiscal year 2016. Included in operating loss in fiscal year 2017 were:

impairment charges of $510.7 million; and
other expenses of $29.7 million.
    
Included in operating loss in fiscal year 2016 were:

impairment charges of $466.2 million; and
other expenses of $27.1 million.

Interest Expense, net.  Net interest expense was $295.7 million in fiscal year 2017 and $285.6 million in fiscal year 2016. The significant components of interest expense are as follows:
 
 
Fiscal year ended
(in millions)
 
July 29,
2017
 
July 30,
2016
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
$
7.0

 
$
3.1

Senior Secured Term Loan Facility
 
130.1

 
124.8

mytheresa.com Credit Facilities
 
0.1

 

Cash Pay Notes
 
76.8

 
76.8

PIK Toggle Notes
 
53.8

 
52.5

2028 Debentures
 
8.9

 
8.9

Amortization of debt issue costs
 
24.5

 
24.6

Capitalized interest
 
(6.3
)
 
(7.3
)
Other, net
 
0.7

 
2.2

Interest expense, net
 
$
295.7

 
$
285.6


With respect to the PIK Toggle Notes, we elected to pay the October 2017 interest payment in the form of PIK Interest, which accrues at a rate of 9.50% per annum and will result in the issuance of $28.5 million of additional PIK Toggle Notes in October 2017.

Income Tax Benefit.  Our effective income tax rate of 29.0% and 25.8% on the losses for fiscal years 2017 and 2016 were less than the federal statutory tax rate of 35%. No income tax benefits exist related to the goodwill impairment charges of $196.2 million recorded in fiscal year 2017 and $199.2 million recorded in fiscal year 2016. Excluding the impact of the goodwill impairment charges, our effective income tax rates were 39.3% for fiscal year 2017 and 40.6% for fiscal year 2016, which exceeded the federal statutory tax rate due primarily to state income taxes.
    
While our future effective income tax rate will depend on the factors described above, we currently anticipate that our effective income tax rate in future periods will be closer to our historical effective income tax rate of approximately 37.9% to 39.2%.
We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. The Internal Revenue Service ("IRS") finalized its audits of our fiscal year 2012 and short-year 2013 (prior to the Acquisition) federal income tax returns.  With respect to state, local and foreign jurisdictions, with limited exceptions, we are no longer subject to income tax audits for fiscal years before 2013.  We believe our recorded tax liabilities as of July 29, 2017 are sufficient to cover any potential assessments made by the IRS or other taxing authorities and we will continue to review our recorded tax liabilities for potential audit assessments based upon subsequent events, new information and future circumstances.  We believe it is reasonably possible that adjustments to the amounts of our unrecognized tax benefits could occur within the next 12 months as a result of settlements with tax authorities or expiration of statutes of limitations.  At this time, we do not believe such adjustments will have a material impact on our Consolidated Financial Statements.

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Results of Operations for the Fiscal Year Ended July 30, 2016 Compared to the Fiscal Year Ended August 1, 2015
 
Revenues.  Our revenues for fiscal year 2016 of $4,949.5 million decreased by $145.6 million, or 2.9%, from $5,095.1 million in fiscal year 2015. Comparable revenues for fiscal year 2016 decreased 4.1% compared to fiscal year 2015.

Changes in comparable revenues by quarter were:
Fiscal year 2016
 
 
Fourth quarter
 
(4.1
)%
Third quarter
 
(5.0
)
Second quarter
 
(2.4
)
First quarter
 
(5.6
)

In fiscal year 2016, we generated negative comparable revenue increases. We believe these results were impacted by a number of factors, including:

the volatility and uncertainty in domestic and global economic conditions and the resulting impact on the market for luxury merchandise;
the strengthening of the U.S. dollar against international currencies, most notably the Euro and British pound, a resulting impact on tourism and spending by international customers in the U.S.; and
a significant decline in the global price for crude oil and the resulting impact on stakeholders in the oil and gas industries, particularly in the Texas markets in which we have a significant presence.

Revenues generated by our online operations in fiscal year 2016 were $1,436.1 million, or 29.0% of consolidated revenues. Comparable revenues from our online operations in fiscal year 2016, which included the revenues of MyTheresa beginning in the second quarter of fiscal year 2016, increased 4.4% from the prior year.
 
Cost of Goods Sold Including Buying and Occupancy Costs (Excluding Depreciation). COGS increased to 67.1% of revenues in fiscal year 2016 from 64.9% of revenues in fiscal year 2015. Compared to the prior year, COGS as a percentage of revenues increased by 220 basis points due primarily to:
    
decreased product margins of approximately 200 basis points due primarily to higher markdowns and promotional costs incurred on lower than expected revenues; and
the deleveraging of buying and occupancy costs of approximately 20 basis points.
 
Selling, General and Administrative Expenses (Excluding Depreciation).  SG&A expenses as a percentage of revenues decreased to 22.6% in fiscal year 2016 compared to 22.8% of revenues in fiscal year 2015. This decrease is due primarily to:

payroll, incentive compensation and benefits expense savings realized of approximately 50 basis points in connection with Organizing for Growth and other efficiency initiatives; and
lower non-cash stock compensation expenses of approximately 20 basis points due to a reduction in the required liability for stock option awards requiring variable accounting; partially offset by
higher levels of expenses of approximately 30 basis points incurred in connection with our strategic initiatives, including costs related to the opening of new stores (our store in Garden City, New York opened in February 2016), the remodeling of existing stores, investments in technology and the growth of our international revenues through MyTheresa; and
higher selling costs of approximately 20 basis points due to higher marketing expenses, related primarily to our online operations, and higher levels of credit card chargebacks subsequent to regulatory changes effective October 2015 with respect to retailers' liabilities for such losses.
 
Income from Credit Card Program.  Income from our credit card program was $60.6 million, or 1.2% of revenues, in fiscal year 2016 compared to $52.8 million, or 1.0% of revenues, in fiscal year 2015. Compared to the prior year, income from our credit card program as a percentage of revenues increased by 20 basis points due primarily to increases in both the overall profitability of the credit card portfolio and the portion of income contractually allocable to the Company.


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Depreciation and Amortization Expenses.  Depreciation expense was $226.9 million, or 4.6% of revenues, in fiscal year 2016 compared to $185.6 million, or 3.6% of revenues, in fiscal year 2015. The increase in depreciation expense in fiscal year 2016 compared to fiscal year 2015 was driven by a higher level of capital spending since the Acquisition related to new stores, store remodels and omni-channel initiatives.

Amortization of intangible assets (primarily customer lists and favorable lease commitments) was $111.2 million, or 2.2% of revenues, in fiscal year 2016 compared to $137.3 million, or 2.7% of revenues, in fiscal year 2015. Amortization expense as a percentage of revenues decreased by 50 basis points in fiscal year 2016 due primarily to lower amortization charges with respect to our customer lists. Our customer lists are amortized using accelerated methods which reflect the pattern in which we receive the economic benefit of the asset.

Other Expenses.  Other expenses in fiscal year 2016 aggregated $27.1 million, or 0.5% of revenues, compared to $39.5 million, or 0.8% of revenues, in fiscal year 2015. Other expenses consisted of the following components:
 
 
Fiscal year ended
(in millions)
 
July 30,
2016
 
August 1,
2015
 
 
 
 
 
Expenses incurred in connection with strategic initiatives
 
$
24.3

 
$
11.6

MyTheresa acquisition costs
 
4.4

 
19.4

Expenses related to Cyber-attack, net of insurance recoveries
 
1.0

 
4.1

Net gain from facility closure
 
(5.6
)
 

Other expenses
 
2.9

 
4.3

Total
 
$
27.1

 
$
39.5


We incurred professional fees and other costs aggregating $24.3 million in fiscal year 2016 in connection with our Organizing for Growth and NMG One strategic initiatives. In connection with Organizing for Growth, we eliminated approximately 500 positions across our stores, divisions and facilities on October 1, 2015 and incurred $10.2 million of severance costs.

In October 2014, we acquired MyTheresa, a luxury retailer headquartered in Munich, Germany. Acquisition costs consisted primarily of professional fees as well as adjustments of our earn-out obligations to estimated fair value at each reporting date.

We discovered in January 2014 that malicious software was clandestinely installed on our computer systems. In fiscal year 2016 and 2015, we incurred investigative, legal and other expenses in connection with the Cyber-Attack.

In the third quarter of fiscal year 2016, we recorded a $5.6 million net gain related to the closure and relocation of our regional service center in New York.

Impairment Charges. Based upon our assessment of economic conditions, our expectations of future business conditions and trends and our projected revenues, earnings and cash flows, we determined certain of our property and equipment, other definite-lived intangible assets, tradenames and goodwill to be impaired, primarily related to our Neiman Marcus brand, and recorded impairment charges in the fourth quarter of fiscal year 2016 aggregating $466.2 million.

Operating Earnings (Loss). We had operating losses of $261.7 million, or 5.3% of revenues, in fiscal year 2016 compared to operating earnings of $318.0 million, or 6.2% of revenues, in fiscal year 2015. Included in operating loss in fiscal year 2016 were:

impairment charges of $466.2 million; and
other expenses of $27.1 million.

Included in operating earnings in fiscal year 2015 were:

other expenses of $39.5 million; and
impact of purchase accounting adjustments that increased COGS by $6.8 million related to the step-up in the carrying value of the acquired MyTheresa inventories.

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Interest Expense, net.  Net interest expense was $285.6 million in fiscal year 2016 and $289.9 million in fiscal year 2015. The significant components of interest expense are as follows:
 
 
Fiscal year ended
(in millions)
 
July 30,
2016
 
August 1,
2015
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
$
3.1

 
$
1.5

Senior Secured Term Loan Facility
 
124.8

 
125.6

mytheresa.com Credit Facilities
 

 

Cash Pay Notes
 
76.8

 
76.8

PIK Toggle Notes
 
52.5

 
52.5

2028 Debentures
 
8.9

 
8.9

Amortization of debt issue costs
 
24.6

 
24.6

Capitalized interest
 
(7.3
)
 
(2.4
)
Other, net
 
2.2

 
2.5

Interest expense, net
 
$
285.6

 
$
289.9


Income Tax Expense (Benefit).  Our effective income tax rate of 25.8% on the loss for fiscal year 2016 was less than the federal statutory tax rate of 35%. No income tax benefit exists related to the $199.2 million goodwill impairment charge recorded in fiscal year 2016. Excluding the impact of the goodwill impairment charge, our effective income tax rate was 40.6% for fiscal year 2016, which exceed the federal statutory tax rate due primarily to state income taxes.

Our effective income tax rate of 46.8% on the earnings for fiscal year 2015 exceeded the federal statutory tax rate due primarily to:

state income taxes; and
the non-deductible portion of transaction and other costs incurred in connection with the MyTheresa acquisition.

Non-GAAP Financial Measures
 
To supplement our financial information presented in accordance with generally accepted accounting principles ("GAAP"), we use EBITDA and Adjusted EBITDA to monitor and evaluate the performance of our business and believe the presentation of these measures enhances investors’ ability to analyze trends in our business and evaluate our performance relative to other companies in our industry. We define (i) EBITDA as earnings before interest, taxes, depreciation and amortization and (ii) Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, further adjusted to eliminate the effects of items management does not believe are representative of our ongoing performance. These financial metrics are not presentations made in accordance with GAAP.
 
EBITDA and Adjusted EBITDA should not be considered as alternatives to operating earnings (loss) or net earnings (loss) as measures of operating performance. In addition, EBITDA and Adjusted EBITDA are not presented as and should not be considered as alternatives to cash flows as measures of liquidity. EBITDA and Adjusted EBITDA have important limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP.

These limitations include the fact that:

EBITDA and Adjusted EBITDA:
exclude certain tax payments that may represent a reduction in cash available to us;
in the case of Adjusted EBITDA, exclude certain adjustments for purchase accounting;
do not reflect changes in, or cash requirements for, our working capital needs, capital expenditures or contractual commitments;
do not reflect our significant interest expense; and
do not reflect the cash requirements necessary to service interest or principal payments on our debt.

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although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and
other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

In calculating these financial measures, we make certain adjustments that are based on assumptions and estimates that may prove inaccurate. In addition, in the future we may incur expenses similar to those eliminated in this presentation. The following table reconciles net earnings (loss) as reflected in our Consolidated Statements of Operations prepared in accordance with GAAP to EBITDA and Adjusted EBITDA:
 
Fiscal year ended
 
Thirty-nine
weeks ended
 
 
Thirteen
weeks ended
 
Fiscal year ended
 
July 29,
2017
 
July 30,
2016
 
August 1,
2015
 
August 2,
2014
 
 
November 2,
2013
 
August 3,
2013
(dollars in millions)
(Successor)
 
(Successor)
 
(Successor)
 
(Successor)
 
 
(Predecessor)
 
(Predecessor)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings (loss)
$
(531.8
)
 
$
(406.1
)
 
$
14.9

 
$
(134.1
)
 
 
$
(13.1
)
 
$
163.7

Income tax expense (benefit)
(217.1
)
 
(141.1
)
 
13.1

 
(89.8
)
 
 
7.9

 
113.7

Interest expense, net
295.7

 
285.6

 
289.9

 
232.7

 
 
37.3

 
169.0

Depreciation expense
225.5

 
226.9

 
185.6

 
113.3

 
 
34.2

 
141.5

Amortization of intangible assets and favorable lease commitments
104.0

 
111.2

 
137.3

 
148.6

 
 
11.7

 
47.4

EBITDA
$
(123.7
)

$
76.4

 
$
640.8

 
$
270.8

 
 
$
78.1

 
$
635.3

EBITDA as a percentage of revenues
(2.6
)%
 
1.5
%
 
12.6
%
 
7.3
%
 
 
6.9
%
 
13.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Impairment charges (1)
510.7

 
466.2

 

 

 
 

 

Amortization of inventory step-up (2)

 

 
6.8

 
129.6

 
 

 

Incremental rent expense (3)
9.7

 
10.5

 
11.0

 
8.5

 
 
0.8

 
4.0

Transaction and other costs (4)
3.3

 
4.4

 
19.4

 
55.4

 
 
109.4

 

Non-cash stock-based compensation (5)
(1.2
)
 
(10.4
)
 
0.1

 
6.2

 
 
2.5

 
9.7

Expenses incurred in connection with openings of new stores / remodels of existing stores (6)
8.6

 
15.1

 
12.3

 
4.0

 
 
1.8

 
5.1

Expenses incurred in connection with strategic initiatives (7)
21.3

 
24.3

 
11.6

 
5.7

 
 
0.2

 

Expenses related to Cyber-Attack, net of insurance recoveries (8)
1.5

 
1.0

 
4.1

 
12.6

 
 

 

Net gain from facility closure (9)

 
(5.6
)
 

 

 
 

 

Equity in loss of Asian e-commerce retailer / professional fees (10)

 

 

 
3.6

 
 
1.5

 
14.2

Management fee due to Former Sponsors (11)

 

 

 

 
 
2.8

 
10.0

Other expenses
3.6

 
2.9

 
4.3

 
4.8

 
 

 
4.3

Adjusted EBITDA (12)
$
433.8

 
$
584.9

 
$
710.6

 
$
501.3

 
 
$
197.2

 
$
682.7

Adjusted EBITDA as a percentage of revenues
9.2
 %
 
11.8
%
 
13.9
%
 
13.5
%
 
 
17.5
%
 
14.7
%

 
(1)
In fiscal year 2017, we recorded pretax impairment charges related to (i) $309.7 million for the writedown to fair value of the net carrying value of tradenames, (ii) $196.2 million for the writedown to fair value of goodwill and (iii) $4.8 million for the writedown to fair value of the net carrying value of certain long-lived assets.
In fiscal year 2016, we recorded pretax impairment charges related to (i) $228.9 million for the writedown to fair value of the net carrying value of tradenames, (ii) $199.2 million for the writedown to fair value of goodwill and (iii) $38.1 million for the writedown to fair value of the net carrying value of certain long-lived assets.
(2)
The carrying values of inventories acquired in connection with the Acquisition and the acquisition of MyTheresa were stepped up to estimated fair value as of the respective acquisition dates and amortized into cost of goods sold as the acquired inventories were sold.

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(3)
Rental obligations and deferred real estate credits were revalued at fair value in connection with the Acquisition. These fair value adjustments increase post‑acquisition rent expense.
(4)
Amounts relate to costs and expenses incurred in connection with the Acquisition and the acquisition of MyTheresa and are not expected to recur subsequent to fiscal year 2017.
(5)
Non-cash stock-based compensation includes a $4.7 million adjustment recorded in fiscal year 2017 and a $14.3 million adjustment recorded in fiscal year 2016 to reduce our liability awards to estimated fair value.
(6)
Amounts represent direct and incremental expenses incurred in connection with the openings of new stores as well as remodels to our existing stores.
(7)
Amounts represent direct expenses incurred in connection with strategic initiatives, primarily NMG One and Organizing for Growth.
(8)
For a further description of the Cyber‑Attack, see Item 1A, “Risk Factors—Risks Related to Our Business and Industry—A breach in information privacy could negatively impact our operations” and Note 12 of the Notes to Consolidated Financial Statements.
(9)
Amount represents a net gain related to the closure and relocation of our regional service center in New York.
(10)
Amounts relate to our equity in losses and professional fees incurred in connection with our prior non‑controlling investment in an Asian e‑commerce retailer.
(11)
Amounts represent management fees paid to the Former Sponsors prior to the Acquisition.
(12)
Excluded from the adjustments to calculate Adjusted EBITDA are the estimated impacts from the launch of our new NMG One integrated merchandising and distribution system in the first quarter of fiscal year 2017. We experienced issues with respect to the functionality and capabilities of certain portions of the new system. These issues primarily related to the processing of inventory receipts at our distribution centers, the timely payment of certain merchandise receipts, the transfer of inventories to our stores and the presentation of inventories on our websites. These issues prevented us from fulfilling certain customer demand in both our stores and websites.

As a result of these implementation issues, we believe:

our revenues were adversely impacted;
incremental markdowns were incurred;
additional incremental costs, primarily for consulting services, were incurred; and
significant internal resources were allocated to address these issues.

Based on available data, we estimate that these issues resulted in unrealized revenues of approximately $55 to $65 million during fiscal year 2017. However, we believe the full impact of the NMG One implementation issues on our revenues is likely greater because there are a number of ways in which our business has been disrupted that we cannot directly track or measure.

Inflation and Deflation
 
We believe changes in revenues and net earnings that have resulted from inflation or deflation have not been material during the past three fiscal years. We have experienced certain inflationary effects in our cost base due to increases in selling, general and administrative expenses, particularly with regard to employee health care and other benefits. For more information regarding the effects of changes in foreign currency exchange rates, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Risk."


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Liquidity and Capital Resources
 
Our liquidity requirements consist principally of:
 
the funding of our merchandise purchases; 
operating expense requirements;
debt service requirements; 
capital expenditures for expansion and growth strategies, including new store construction, store remodels and upgrades of our management information systems; 
income tax payments; and
obligations related to our defined benefit pension plan ("Pension Plan").
 
Our primary sources of short-term liquidity are comprised of cash and cash equivalents (including credit card receivables), availability under the Asset-Based Revolving Credit Facility and vendor payment terms. The amounts of cash and cash equivalents and borrowings under the Asset-Based Revolving Credit Facility are influenced by a number of factors, including revenues, working capital levels, vendor terms, the level of capital expenditures, cash requirements related to financing instruments and debt service obligations, Pension Plan funding obligations and tax payment obligations, among others.
 
Our working capital requirements fluctuate during the fiscal year, increasing substantially during the first and third quarters of each fiscal year as a result of higher seasonal levels of inventories. We have typically financed our cash requirements with available cash and cash equivalents, cash flows from operations and, if necessary, with cash provided from borrowings under our revolving credit facilities. Pursuant to these credit facilities, we had outstanding borrowings of $263.0 million as of July 29, 2017, all of which represents borrowings under our Asset-Based Revolving Credit Facility, compared to $165.0 million as of July 30, 2016. At July 29, 2017, we had unused borrowing commitments of $651.1 million, subject to a borrowing base, of which (i) $90.0 million of such capacity is available to us subject to the maintenance of a minimum fixed charge coverage ratio and to further restrictions described below under "Financing Structure at July 29, 2017" and (ii) $17.1 million of such capacity is available only to MyTheresa under its credit facilities and not to our U.S. operations. Additionally, we held cash and cash equivalents and credit card receivables of $88.1 million bringing our available liquidity to $739.2 million at July 29, 2017, inclusive of the amount available to MyTheresa.

Under the Asset-Based Revolving Credit Facility, if "excess availability" falls below 10% of aggregate revolving commitments, we will be required to maintain a minimum fixed charge coverage ratio and we may be subject to further restrictions as discussed below under "Financing Structure at July 29, 2017".
 
We believe that cash generated from our operations, our existing cash and cash equivalents and available sources of financing will be sufficient to fund our cash requirements during the next 12 months, including merchandise purchases, operating expenses, anticipated capital expenditure requirements, debt service requirements, income tax payments and obligations related to our Pension Plan.

We regularly evaluate our liquidity profile, and various financing, refinancing and other alternatives for opportunities to enhance our capital structure and address maturities under our existing debt arrangements. If opportunities are available on favorable terms, we may seek to refinance, exchange, amend or extend the terms of our existing debt or issue or incur additional debt, and may engage with existing and prospective holders of our debt in connection with such matters. Although we are actively pursuing opportunities to improve our capital structure, some or all of the foregoing potential transactions or other alternatives may not be available to us or announced in the foreseeable future or at all.
 
Net cash provided by our operating activities was $147.0 million in fiscal year 2017 compared to $310.6 million fiscal year 2016. In fiscal year 2017, the decrease in net cash provided by operating activities was driven by (i) the decline in cash generated by our operating activities on a lower level of revenues and (ii) higher working capital requirements driven by higher inventories. Additionally, we made required fundings to our Pension Plan of $10.7 million in fiscal year 2017.

Net cash used for investing activities, primarily representing capital expenditures, was $204.6 million in fiscal year 2017 compared to $302.3 million in fiscal year 2016. The decrease in capital expenditures in fiscal year 2017 reflects lower spending for NMG One, the construction of new stores and the remodeling of existing stores.


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Table of Contents

Currently, we project capital expenditures for fiscal year 2018 to be approximately $208 to $218 million. Net of developer contributions, capital expenditures for fiscal year