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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

 

x           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended August 3, 2013

 

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 Inc.

(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 x

 

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 ¨  No x

 

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 x  No ¨

 

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 x  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. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ¨  No x

 

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant is zero.  The registrant is a privately held corporation.

 

As of September 18, 2013, the registrant had outstanding 1,019,728 shares of its common stock, par value $0.01 per share.

 

 

 


 


Table of Contents

 

NEIMAN MARCUS GROUP LTD INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED AUGUST 3, 2013

TABLE OF CONTENTS

 

 

 

Page No.

PART I

 

 

Item 1.

Business

2

Item 1A.

Risk Factors

12

Item 1B.

Unresolved Staff Comments

19

Item 2.

Properties

20

Item 3.

Legal Proceedings

21

Item 4.

Mine Safety Disclosures

22

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

22

Item 6.

Selected Financial Data

23

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

47

Item 8.

Financial Statements and Supplementary Data

48

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

48

Item 9A.

Controls and Procedures

48

Item 9B.

Other Information

48

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

49

Item 11.

Executive Compensation

53

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

77

Item 13.

Certain Relationships and Related Transactions, and Director Independence

82

Item 14.

Principal Accounting Fees and Services

84

PART IV

 

 

Item 15.

Exhibits, Financial Statement Schedules

85

Signatures

Signatures

92

 

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PART I

 

ITEM 1.     BUSINESS

 

Business Overview

 

We are one of the largest luxury, multi-branded, omni-channel fashion retailers in the world. We offer distinctive merchandise to a highly loyal and affluent customer base. With a history of 100+ years in retailing, the Neiman Marcus and Bergdorf Goodman brands are recognized as synonymous with fashion, luxury and style. We have established ourselves as a leading fashion authority among luxury consumers and are a premier retail partner for many of the world’s most exclusive designers. In fiscal year 2013, we generated revenues of $4.6 billion, which was an increase of 7.0% from fiscal year 2012, operating earnings of $446.4 million, or 9.6% of revenues, and EBITDA of $635.3 million, or 13.7% of revenues.  In fiscal year 2013, the 53rd week generated revenues of $61.9 million, operating earnings of $10.7 million and EBITDA of $13.6 million.

 

In our omni-channel retailing model, we operate in both the in-store and online retail channels to provide our customers with the ability to shop “anytime, anywhere, any device.” We believe this omni-channel model maximizes the recognition of our brands and strengthens our customer relationships. We are investing and plan to continue to invest resources to further enhance the customer’s seamless shopping experience across channels, which is consistent with our customers’ expectations as well as our core value of exceptional customer service. We report our store operations as our Specialty Retail Stores segment and our direct-to-consumer operations as our Online segment.

 

We currently operate 41 Neiman Marcus full-line stores in prime retail locations in major U.S. markets, including U.S. gateway cities that draw customers from all over the world. In addition, we operate two Bergdorf Goodman stores in landmark locations on Fifth Avenue in New York City. Neiman Marcus and Bergdorf Goodman cater to a highly affluent customer, offering distinctive luxury women’s and men’s apparel and accessories, handbags, cosmetics, shoes and designer and precious jewelry. In addition, we operate 36 off-price, smaller format stores under the brand Last Call® catering to an aspirational, price-sensitive yet fashion-minded customer. We also operate six smaller format stores under the brand CUSP® catering to a younger customer focused on contemporary fashion.

 

We complement our in-store operations with direct-to-consumer sales through our Online business, which currently generates annual revenues of just over $1 billion, primarily through our e-commerce websites under the brands Neiman Marcus®, Bergdorf Goodman®, Last Call®, CUSP® and Horchow®. In addition, we have taken recent steps to globalize our Neiman Marcus brand. In 2012, we launched international shipping to over 100 countries, including Canada, Japan, Australia, Russia and several countries in the Middle East. In addition, we launched a full-price, Mandarin language e-commerce website for the Neiman Marcus brand to cater to the growing affluent population in China. Our well-established, online operation expands the reach of our brands internationally and beyond the trading area of our U.S. retail stores. Almost 40% of our online Neiman Marcus customers for fiscal year 2013 were located outside of the trade areas of our existing full-line store locations. We also use our Online operations as selling and marketing tools to increase the visibility and exposure of our brands and generate customer traffic within our retail stores.

 

On September 9, 2013, we entered into an Agreement and Plan of Merger (the Merger Agreement) with NM Mariposa Holdings, Inc. and Mariposa Merger Sub LLC, both of which are owned by an investment group consisting of investment funds affiliated with Ares Management LLC and Canada Pension Plan Investment Board (collectively, our Future Sponsors).  Under the Merger Agreement, we will be acquired for a purchase price based on a total enterprise value of $6.0 billion (the Future Sponsors’ Acquisition).  A portion of the purchase price will be used at closing to repay all amounts outstanding under our existing senior secured credit facilities.  The currently outstanding 7.125% Senior Debentures due 2028 are expected to remain outstanding immediately following the closing of the transaction in accordance with the terms of the indenture governing such debentures.  Consummation of the merger is subject to various conditions, including (i) the absence of a material adverse effect on the Company, as defined in the Merger Agreement, (ii) the expiration or termination of any applicable waiting period under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976 (which has now occurred) and (iii) the completion of the marketing period related to financing of the Future Sponsors’ Acquisition as provided for under the Merger Agreement.  We currently anticipate the closing date for the Future Sponsors’ Acquisition to occur in October or November 2013.

 

Our Market Opportunity

 

We operate in the growing luxury apparel and accessories segment of the retail industry and market and sell merchandise, both in-store and online. Our luxury-branded fashion vendors include, among others, Chanel, Gucci, Prada, David Yurman, Giorgio Armani, Akris, Brioni, Ermenegildo Zegna, Christian Louboutin, Van Cleef & Arpels and Tom Ford. Luxury and fashion brands intentionally maintain limited distribution of their merchandise to maximize brand exclusivity and to facilitate the sale of their goods at premium prices. Our omni-channel model offers our designers

 

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a distinctive distribution channel that adheres to their standards with respect to brand image and customer service. As a result, we believe we are the largest worldwide partner to many luxury brands. Additionally, we often work with less mature brands that are emerging in the fashion and luxury industry. We have a long history of identifying, developing and nurturing these emerging brands. This combination of established and new designers distinguishes our merchandise assortment and customer shopping experience.

 

We believe that the global luxury goods industry is a very attractive segment of the overall apparel and accessories market. The global luxury goods industry has experienced strong growth since 2005 with this growth expected to continue.   We believe growth in the online distribution channel for global luxury goods will continue to outpace the growth in the broader market.  We believe that we are well-positioned to benefit from these trends, given that our core customer is affluent, well-educated and wired.

 

Our Competitive Strengths

 

We believe the following strengths differentiate us from our competitors and position us well for future growth.

 

One of the largest luxury, multi-branded, omni-channel retailers enabling us to reach the wealthiest consumers worldwide

 

We are one of the largest luxury, multi-branded, omni-channel fashion retailers in the world with what we believe to be two of the most globally recognized and reputable luxury brands—Neiman Marcus and Bergdorf Goodman. With a history of 100+ years in retailing, our iconic brands are recognized as synonymous with fashion, luxury and style. With approximately $4.6 billion in revenues in fiscal year 2013, we are significantly larger than other North American and European luxury, multi-branded retailers. We have an extensive omni-channel platform across our brands. Our significant investments in our omni-channel model enable our customers to shop “anytime, anywhere, any device.” Our stores are located in prime locations in metropolitan markets, including U.S. gateway cities that draw customers from around the world such as New York City, Miami, Los Angeles, San Francisco and Las Vegas. Our online operation enables us to reach the world’s wealthiest consumers, which is critical to addressing the needs of our evolving global, fashion-conscious luxury consumers. We believe that our size, our reach, our reputation and our long-term relationships with designers allow us to obtain a better brand selection and a higher allocation of top merchandise.

 

Highly productive store base offering our customers a differentiated and personalized shopping experience

 

We have a highly profitable and productive store base in many of the country’s most prestigious locations. The combined store productivity of our Neiman Marcus and Bergdorf Goodman stores, which was $552 per square foot for fiscal year 2013, has consistently outperformed other luxury and premium multi-branded retailers over the last 10 years. Our shopping experience is highly differentiated. We offer our customers a curated selection of merchandise tailored to local aesthetics. Each of our stores is individually designed by market and provides a sumptuous shopping environment with high-end finishings, artwork and, in most cases, in-store restaurants. When combined with our strong selling culture, our stores provide our customers with a luxurious and enjoyable shopping experience.

 

Through Bergdorf Goodman, we believe we are the premier luxury multi-branded retailer in New York City, providing our customers with a shopping experience that we believe to be unlike any other. Located in landmark Fifth Avenue locations near Central Park and The Plaza Hotel, we believe Bergdorf Goodman represents an iconic shopping destination in Manhattan for both U.S. and international customers. The stores offer ultra-luxury merchandise and provide a desirable showcase for both established and emerging fashion brands.

 

Exceptional real estate locations with favorable terms for full-line stores

 

We believe our full-line stores have the highest quality locations across the United States, a footprint that would be challenging to replicate. Our full-line stores are situated among the highest-end luxury boutiques and upscale retailers in the most prestigious shopping centers, malls and other metropolitan shopping destinations that are frequented by the wealthiest of customers. We believe that our brand, reputation and strength in the luxury market have allowed us to obtain our premier locations on favorable terms. Over 90% of our full-line store real estate leases have maturities over 25 years, including renewal options, providing us with substantial operating stability for our store base. Our real estate strategy with respect to our full-line stores allows us to obtain favorable pricing, resulting in an attractive rent structure.

 

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Leader in luxury online retailing with the largest assortment of luxury brands

 

We believe that we were one of the first major luxury fashion online retailers in the world, which positions us well as a leader in this evolving channel. Our Online operation currently accounts for annual revenues of just over $1 billion, which we believe makes it one of the largest luxury, multi-branded online platforms. This represents a compounded annual growth rate of approximately 15% since fiscal year 2010. We believe that our scale and success allow us to provide our customers with an assortment of luxury merchandise online that is unmatched by other U.S. luxury and premium multi-branded retailers. Furthermore, our online data analytics capabilities allow us to tailor our marketing and provide our customers with a highly personalized shopping experience.  At approximately 22% of our total revenues in fiscal year 2013, our online retailing operation represents a critical element of our omni-channel strategy.

 

Leading portfolio of established and emerging luxury and fashion brands

 

As a leading fashion authority among luxury consumers, we carry many of the world’s most exclusive designers. We have highly skilled merchandising teams for each of our brands, which enable us to optimize each channel and offer curated assortments that are customized at the store level based on our extensive local market knowledge and online data analytics. As a result, we offer a broad selection of highly differentiated and distinctive luxury merchandise to fully address our customers’ lifestyle needs. We have long-standing, 25+ year relationships with most of our largest vendors. In addition, we also have a long history of identifying, developing and nurturing emerging design talent. We believe that these relationships with both established and emerging designers allow us to obtain a better brand selection, including in some instances merchandise and brands that are exclusive to us, and superior allocation of merchandise, providing our customers with a distinctive shopping experience.

 

Customer service led organization fosters strong customer relationships and loyalty and drives sales

 

We maintain superior customer service initiatives that enable us to engage with our customers and cultivate long-term relationships and customer loyalty to increase sales.

 

InCircle® Loyalty Program:  We believe we were among the first retailers to adopt a customer loyalty program, and we believe that our InCircle loyalty program helps drive incremental sales as our InCircle members visit our stores more frequently and spend significantly more than other customers. Approximately 40% of our total revenues in fiscal year 2013 were generated by 143,000 InCircle members who achieved reward status.  Our InCircle program focuses on our most active customers to drive engagement, resulting in an increased number of transactions and sales by offering attractive member benefits such as private in-store events, special exclusive offers, as well as the ability to earn gift cards.

 

Our Sales Associates:  Our sales associates provide exceptional and differentiated customer service, instilling and reinforcing our culture of relationship-based service recognized by our customers. Our commission-based sales associates have an average tenure of over seven years and are highly productive.  We have empowered our sales force with technology by rolling out to them approximately 7,000 smart phones and tablets, which further enhances customer communication and engagement. Our emphasis is on building long-term customer relationships rather than transactional-based results, which has led to consistently strong customer service scores.

 

Exceptional management team with world-class execution skills

 

Our senior leadership team has deep experience across a broad range of disciplines in the retail industry including sales, marketing, merchandising, operations, logistics, information technology, e-commerce, real estate and finance. Karen Katz, our Director, President and Chief Executive Officer, joined Neiman Marcus in 1985 and has been in charge of a variety of our business units, including leading both the Neiman Marcus Stores and Neiman Marcus Direct businesses during her tenure. Ms. Katz’s strong and consistent leadership is complemented by a deep bench of executives with an average of 22 years of experience in the retail industry, and an average of 11 years with us. James Skinner, our Executive Vice President, Chief Operating Officer and Chief Financial Officer, brings over twenty years of retail experience to Neiman Marcus and has held multiple senior leadership positions with us since joining in 2000. James Gold, our President of Specialty Retail, joined us in 1991 and, prior to assuming his current role, was the Chief Executive Officer of Bergdorf Goodman from May 2004 to October 2010. While many of our executives have deep rooted experience at Neiman Marcus in a variety of management positions, we have also hired executives who bring fresh, outside perspectives and expertise to our organization. In June 2011, we hired John Koryl as the President of Neiman Marcus Direct. Mr. Koryl brings six years of e-commerce experience at Williams-Sonoma and eBay. In May 2011, we hired Joshua Schulman as the President of Bergdorf Goodman. Mr. Schulman was the Chief Executive Officer of Jimmy Choo for five years and held various senior executive roles at Kenneth Cole, Gap and Gucci. Our management team has demonstrated a successful track record of delivering strong

 

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growth and increased profitability. As a result, we believe that we are well-positioned to execute our growth strategies and continue to deliver superior financial results.

 

Superior financial performance provides momentum for future growth

 

Our business model has allowed us to achieve strong financial results. Over the past three years, we have increased revenues from $4.0 billion to $4.6 billion as of fiscal year 2013. During the same time period, we have consistently achieved positive quarterly comparable revenue growth with an average quarterly increase in excess of 7%. During this period, we increased our operating earnings from $329.7 million to $446.4 million and our EBITDA from $524.7 million to $635.3 million. These strong results and our efficient management of our working capital have allowed us to invest in high-return capital projects and pay down debt. Our business generated strong cash flow from operations of $272.4 million in fiscal year 2011, $259.8 million in fiscal year 2012 and $349.4 million in fiscal year 2013. Our strong cash flow has allowed us to make approximately $1.2 billion in net long-term debt principal repayments and dividend payments since October 2005. For fiscal years 2012 and 2013, our returns on invested capital were 19.8% and 19.0%, respectively.

 

Growth Opportunities

 

We operate in the luxury apparel and accessories segment of the retail industry and we believe the global luxury goods sector is a very attractive segment of the overall apparel and accessories industry.  In addition, we believe growth in the online distribution channel for global luxury goods will continue to outpace the growth in the broader market.  We believe that we are well-positioned to benefit from these trends.  Our goal is to leverage our competitive strengths and to increase our sales productivity and earnings growth to sustain our leadership position within luxury retailing.  Subsequent to the closing of the Future Sponsors’ Acquisition, if successfully completed, we will work with the Future Sponsors to define and implement growth strategies that are aligned with and represent logical extensions of our core competencies of operating specialty retail stores and e-commerce websites within luxury retailing.

 

Components of Our Omni-channel Retailing Model

 

A description of the components of our integrated, omni-channel retailing model follows:

 

Specialty Retail Stores.  Our specialty retail store operations (Specialty Retail Stores) consist primarily of our 41 Neiman Marcus stores and two Bergdorf Goodman stores. Specialty Retail Stores accounted for 77.8% of our total revenues in fiscal year 2013, 79.8% of our total revenues in fiscal year 2012 and 81.1% of our total revenues in fiscal year 2011.

 

·                  Neiman Marcus Stores.  Neiman Marcus stores offer distinctive luxury merchandise, including women’s couture and designer apparel, contemporary sportswear, handbags, fashion accessories, shoes, cosmetics, men’s clothing and furnishings, precious and designer jewelry, decorative home accessories, fine china, crystal and silver, children’s apparel and gift items. We locate our Neiman Marcus stores at carefully selected venues in major metropolitan markets across the United States. We design our stores to provide a feeling of residential luxury by blending art and architectural details from the communities in which our stores are located.

 

·                  Bergdorf Goodman Stores.  Bergdorf Goodman is a premier luxury retailer in New York City well known for its high luxury merchandise, sumptuous shopping environment and landmark Fifth Avenue locations. Like Neiman Marcus, Bergdorf Goodman features high-end apparel, handbags, fashion accessories, shoes, precious and designer jewelry, cosmetics, gift items and decorative home accessories.

 

·                  Small Format Stores.  Also included in our Specialty Retail Stores segment are small format stores we operate under the Last Call and CUSP brands. We operate 36 off-price stores under the Last Call brand. These stores offer off-price goods purchased directly for resale as well as end-of-season clearance goods from our Neiman Marcus stores, Bergdorf Goodman stores and Online operation. In addition, we operate six stores under the CUSP name. CUSP is a smaller store format (6,000 to 11,000 square feet) that targets a younger, fashion savvy customer with a contemporary point of view. Sales from our Neiman Marcus Last Call and CUSP stores account for less than 10% of our total revenues.

 

Online.  To complement the operations of our retail stores, our upscale direct-to-consumer retailing operation (Online) conducts online sales of fashion apparel, handbags, shoes, accessories and home furnishings through the Neiman Marcus and Bergdorf Goodman brands and online sales of home furnishings and accessories through the Horchow brand. Additionally, we operate a website under the Last Call brand that features off-price fashion goods and augments and complements the operations of our Last Call stores. We also run an established online business for the CUSP brand which

 

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caters to a younger customer focused on contemporary fashion. Online generated 22.2% of our total revenues in fiscal year 2013, 20.2% of our total revenues in fiscal year 2012 and 18.9% of our total revenues in fiscal year 2011.

 

We regularly send e-mails to approximately 6.4 million e-mail addresses, alerting our customers to our newest merchandise and the latest fashion trends. In addition to our activities in the United States, in 2012 we launched international shipping to over 100 countries. For certain vendors, we operate their online commercial operations and fulfill customer demand from the vendors’ website from either our owned inventory or inventory consigned from the vendors.

 

We also conduct catalog sales through the Neiman Marcus and Horchow brands. Over 1.4 million customers made a purchase through one of our websites or catalogs in fiscal year 2013. Our catalog business circulated approximately 40 million catalogs in fiscal year 2013, a decrease of approximately 9.0% from the prior year. With the growth of internet revenues, we have reduced catalog circulation in recent years and would expect flat to declining catalog circulation in the foreseeable future.

 

For more information about our reportable segments, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 17 of the Notes to Consolidated Financial Statements in Item 15.

 

Investment in Foreign E-commerce Retailer.  In the third quarter of fiscal year 2012, we made a $29.4 million strategic investment in Glamour Sales Holding Limited, a privately held e-commerce company based in Hong Kong with leading off-price flash sales websites in Asia. In February 2013, we made an additional $10.0 million investment in Glamour Sales increasing our ownership interest to 44%. In the second quarter of fiscal year 2013, Glamour Sales expanded its operations to launch a full-price, Mandarin language e-commerce website in China under the Neiman Marcus brand. Currently, the China Neiman Marcus website offers in-season merchandise and we fulfill these orders from our distribution facility in China. During the fourth quarter of fiscal year 2013, we began the transition of the China Neiman Marcus website from Glamour Sales to our Online operation in the United States. In fiscal year 2014, we intend to fulfill orders from customers in China directly from the United States.

 

Other. 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.  This resulted in an extra week in fiscal year 2013 (the 53rd week).  All references to fiscal year 2013 relate to the fifty-three weeks ended August 3, 2013, all references to fiscal year 2012 relate to the fifty-two weeks ended July 28, 2012 and all references to fiscal year 2011 relate to the fifty-two weeks ended July 30, 2011.  References to fiscal year 2014 and years thereafter relate to our fiscal years for such periods.

 

We 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 (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.

 

The Acquisition

 

On April 22, 2005, Neiman Marcus Group LTD Inc. (the Company), formerly Neiman Marcus, Inc. (formerly Newton Acquisition, Inc.), and its wholly-owned subsidiary, Newton Acquisition Merger Sub, Inc. (Merger Sub), were formed and incorporated in the state of Delaware.  Newton Holding, LLC (Holding), the Company and Merger Sub were formed by investment funds affiliated with TPG Global, LLC (together with its affiliates, TPG) and Warburg Pincus LLC (collectively, the Principal Stockholders) for the purpose of acquiring The Neiman Marcus Group, Inc. (NMG).

 

The acquisition of NMG was completed on October 6, 2005 (the Acquisition Date) through the merger of Merger Sub with and into NMG, with NMG being the surviving entity (the Acquisition).  Subsequent to the Acquisition, NMG is a subsidiary of the Company, which is controlled by Holding.  In connection with the Acquisition, NMG incurred significant indebtedness and became highly leveraged.  We were previously named “Neiman Marcus, Inc.” but were renamed “Neiman Marcus Group LTD Inc.” on August 28, 2013.  See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”  All references to “we” and “our” relate to the Company for periods subsequent to the Acquisition and to NMG for periods prior to the Acquisition.

 

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Customer Service and Marketing

 

We believe that excellent customer service contributes to increased loyalty and purchases by our customers. We are committed to providing our customers with a premier shopping experience whether in-store or online. Our customer service model is supported by:

 

·                  omni-channel marketing programs designed to promote customer awareness of our offerings of the latest fashion trends;

 

·                  our InCircle loyalty program designed to cultivate long-term relationships with our customers;

 

·                  knowledgeable, professional and well-trained sales associates;

 

·                  customer-friendly websites; and

 

·                  a proprietary credit card program facilitating the extension of credit to our customers.

 

We believe we offer our customers fair and liberal return policies consistent with the practices of other luxury and specialty retailers. 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 our brands. 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 sales efforts. The activities include integrated in-store and online promotions of the merchandise of selected designers or merchandise categories. Many of these events are connected to our loyalty program, InCircle®. In addition, events include seasonal in-store and online trunk shows by leading designers featuring the newest fashions from the designer and participation 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 vendors such as Chanel, Prada, Giorgio Armani, Lanvin, Oscar de la Renta and Christian Louboutin.

 

Neiman Marcus and Bergdorf Goodman’s social media platforms include blogs, Twitter feeds and Facebook pages. 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.

 

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 eight times each year. The Book is a high-quality publication featuring the latest fashion trends that is mailed on a targeted basis to our customers and has a yearly printing of almost two million. Our other print publications include the Bergdorf Goodman Magazine and specific designer mailers.

 

In addition to print publications, we leverage our websites and online advertising through banner ads and paid searches, among other things, to communicate and connect with customers looking for fashion information and products online. We believe that the online and print catalog operations offer the customer an omni-channel shopping experience allowing our customers to choose the channel that best fits their needs at any given time.

 

Loyalty Program.  We maintain a loyalty program under the InCircle® brand name designed to cultivate long-term relationships with our customers. Our loyalty program focuses on our most active customers. This program includes marketing features, including private in-store events, as well as 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. Approximately 40% of our total revenues in fiscal year 2013 were generated by our InCircle loyalty program members who achieved reward status.

 

Sales Associates.  Our sales associates instill and reinforce a culture of relationship-based service recognized 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 ensure that

 

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our customers are aware of the latest merchandise offerings and fashion trends. We have equipped our sales force with technology by rolling out to them approximately 7,000 smart phones and tablets, which further enhances our customer communication and engagement. 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.

 

Customer-friendly Websites.  We believe that we offer a high level of service to customers shopping online through easy-to-use site navigation, site speed and functionality and many customer-friendly features such as 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 an efficient and friendly call center.

 

Proprietary Credit Card Program.  Pursuant to an agreement with Capital One, which we refer to as the Program Agreement, Capital One offers proprietary credit card accounts to our customers under both the “Neiman Marcus” and “Bergdorf Goodman” brand names. Our Program Agreement currently extends to July 2020 (renewable thereafter for three-year terms), subject to early termination provisions.

 

Under the terms of the Program Agreement, Capital One currently offers credit cards and non-card payment plans. We receive payments from Capital One based on sales transacted on our proprietary credit cards. We may receive additional payments based on the profitability of the portfolio as determined under the Program Agreement depending on a number of factors including credit losses. 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. Any such changes in our credit card arrangements may adversely affect our credit card program and ultimately, our business.

 

Historically, our customers holding a proprietary credit card 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 2013 and 2012, over 40% of our revenues were transacted through our proprietary credit cards.

 

We utilize data captured 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 brands, merchandise categories and store locations.

 

Merchandise

 

We carry a broad selection of highly differentiated and distinctive luxury merchandise carefully curated by our highly-skilled merchandising group. 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 percentages of revenues by major merchandise category are as follows:

 

 

 

Fiscal year ended

 

 

 

August 3,
2013

 

July 28,
2012

 

July 30,
2011

 

Women’s Apparel

 

31

%

34

%

35

%

Women’s Shoes, Handbags and Accessories

 

27

 

25

 

24

 

Men’s Apparel and Shoes

 

12

 

12

 

12

 

Designer and Precious Jewelry

 

12

 

11

 

11

 

Cosmetics and Fragrances

 

11

 

11

 

10

 

Home Furnishings and Décor

 

5

 

6

 

6

 

Other

 

2

 

1

 

2

 

 

 

100

%

100

%

100

%

 

Substantially all of our merchandise is delivered to us by our vendors 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.

 

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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 vendors to present the merchandise and highlight the best of the vendor’s product. Our primary women’s apparel vendors include Chanel, Gucci, Prada, Giorgio Armani, St. John, Akris and Brunello Cucinelli.

 

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 vendors in this category include Christian Louboutin, Chanel, Manolo Blahnik, Prada, Gucci, Jimmy Choo and Tory Burch in ladies shoes and Chanel, Prada, Gucci, Tory Burch, Balenciaga 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. Bergdorf Goodman has a fully dedicated men’s store on Fifth Avenue in New York. Our primary vendors in this category include Ermenegildo Zegna, Brioni, Giorgio Armani, Tom Ford, Brunello Cucinelli and Loro Piana in men’s clothing and sportswear and Ermenegildo Zegna, Brioni, Prada, Ferragamo, Gucci and Tom Ford in men’s furnishings and shoes.

 

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 vendors in this category include David Yurman, John Hardy and Ippolita in designer jewelry and Roberto Coin and Van Cleef & Arpels in precious jewelry. We often sell precious jewelry that has been consigned to us from the vendor.

 

Cosmetics and Fragrances:  Cosmetics and fragrances include facial and skin cosmetics, skin therapy and lotions, soaps, fragrances, candles and beauty accessories. Our primary vendors of cosmetics and beauty products include La Mer, Chanel, Sisley, Bobbi Brown, La Prairie, Estee Lauder and Laura Mercier.

 

Home Furnishings and Décor:  Home furnishings and décor include linens, tabletop, kitchen accessories, furniture, rugs, decorative items (frames, candlesticks, vases and sculptures) as well as collectables. Merchandise for the home complements our apparel offering in terms of quality and design. Our primary vendors in this category include Jay Strongwater, MacKenzie-Childs and Lalique.

 

Vendor Relationships

 

Our merchandise assortment consists of a broad selection of highly differentiated and distinctive luxury goods purchased from both well-known luxury-branded fashion vendors as well as new and emerging designers. We communicate with our vendors 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 businesses are especially dependent upon our relationships with these designer resources. We monitor and evaluate the sales and profitability performance of each vendor 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 vendor base is diverse, with only one vendor representing more than 5% of the cost of our total purchases in fiscal year 2013. This vendor represented 6.6% of our total purchases in fiscal year 2013. 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 vendors in support of the merchandise we purchase for resale. We also receive advertising allowances from certain of our merchandise vendors, substantially all of which represent reimbursements of direct, specified and incremental costs we incur to promote the vendors’ merchandise. In addition, we receive allowances from certain merchandise vendors in conjunction with compensation allowances for employees who sell the vendors’ merchandise. For more information related to allowances received from vendors, see Note 1 of the Notes to Consolidated Financial Statements in Item 15.

 

In order to expand our product assortment, we offer certain merchandise, primarily precious jewelry, which has been consigned to us from the vendor. As of August 3, 2013 and July 28, 2012, we held consigned inventories with a cost basis of approximately $358.9 million and $328.6 million, respectively. Consigned inventories are not reflected in our Consolidated Balance Sheets as we do not take title to consigned merchandise.

 

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Inventory Management

 

Our merchandising functions are responsible for the determination of the merchandise assortment and quantities to be purchased for each of our channels and, in the case of Neiman Marcus and Last Call stores, for the allocation of merchandise to each store. We currently have approximately 400 merchandise buyers and merchandise planners.

 

The majority of the merchandise we purchase is initially received at one of our centralized distribution facilities. To support our Specialty Retail Stores, we utilize distribution facilities in Longview, Texas and Pittston, Pennsylvania and three regional service centers. We also operate two distribution facilities in the Dallas-Fort Worth area to support our Online operation.

 

Our distribution facilities are linked electronically to our various merchandising staffs to facilitate the distribution of goods to our stores. We utilize electronic data interchange (EDI) technology with certain of our vendors, which is designed to move merchandise onto the selling floor quickly and cost-effectively by allowing vendors 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 vendor’s bar 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.

 

With respect to the Specialty Retail Stores, the majority of the merchandise is held in our retail stores. We primarily operate on a pre-distribution model through which we allocate merchandise on our initial purchase orders to each store. This merchandise is shipped from our vendors 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. Transfers of goods between stores are made primarily at the direction of merchandising personnel and, to a lesser extent, by store management primarily to fulfill customer requests.

 

We also maintain inventories at the Longview and Pittston distribution facilities. The goods held at these distribution facilities consist primarily of goods held in limited assortment or quantity by our stores and replenishment goods available to stores achieving high initial sales levels. With our “locker stock” inventory management program, we maintain a portion of our most in-demand and high fashion merchandise at our distribution facility. For products stored in locker stock, we can ship replenishment merchandise to the stores that demonstrate the highest customer demand. In addition, our sales associates can use the program to ship items directly to our customers, thereby improving customer service and increasing productivity. This program also 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 supporting our Online operations facilitate the receipt and storage of inventories from vendors, fulfill customer orders on a timely and efficient basis and receive, research and resolve customer returns.

 

In connection with our omni-channel approach to retailing, we implemented technologies and processes in fiscal year 2012 whereby certain inventories were made available to both our in-store and online channels. For these merchandise categories, our sales associates are able to fulfill customer demand originating in-stores from the inventories held in their assigned store, other stores or the distribution and warehouse facilities supporting both our store and online channels. Conversely, website orders can be fulfilled from our distribution and warehouse facilities as well as from our retail stores. We are expanding and will continue to expand our capabilities to share inventories across our store and online channels in fiscal year 2014 and beyond.

 

Capital Investments

 

We make capital investments annually to support our long-term business goals and objectives. We invest capital in new and existing stores, e-commerce websites, distribution and support facilities as well as information technology. We have gradually increased the number of our stores over the past ten years, growing our full-line Neiman Marcus and Bergdorf Goodman store base from 36 stores at the beginning of fiscal year 2003 to our current 43 stores.

 

We invest capital in the development and construction of new stores in both existing and new markets. 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, consequently, our brand. 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. In addition to the construction of new stores, we also invest in the on-going maintenance of our stores to ensure an elegant

 

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shopping experience for our customers. Capital expenditures for existing stores include 1) expenditures to maintain the ambiance and luxurious shopping experience within our stores, 2) designer shops within our stores to deepen our relationships with our designers and increase the visibility of select fashion brands, 3) ongoing investments in technology to support our omni-channel efforts and improve the overall in-store customer experience, 4) minor renovations of certain areas within the store, including in-store “shop in shops”, and 5) major remodels and renovations and store expansions. With respect to our major remodels, we only expand after extensive analysis of our projected returns on capital. We generally experience an increase in total revenues at stores that undergo a remodel or expansion.

 

We also believe capital investments for information technology in our stores, websites, distribution facilities and support functions are necessary to support our business strategies. As a result, we are continually upgrading our information systems to improve efficiency and productivity.

 

In the past three fiscal years, we have made capital expenditures aggregating $393.5 million related primarily to:

 

·                  the construction of a new store in Walnut Creek, California and construction of a distribution facility in Pittston, Pennsylvania;

 

·                  e-commerce and technology investments;

 

·                  enhancements to merchandising and store systems; and

 

·                  the renovation of our main Bergdorf Goodman store on Fifth Avenue in New York City and Neiman Marcus stores in Bal Harbour, Florida and Chicago, Illinois.

 

Currently, we project gross capital expenditures for fiscal year 2014 to be approximately $190 to $200 million. Net of developer contributions, capital expenditures for fiscal year 2014 are projected to be approximately $170 to $180 million.

 

We receive allowances from developers related to the construction of our stores thereby reducing our cash investment in these stores. We received construction allowances aggregating $7.2 million in fiscal year 2013 and $10.6 million in fiscal year 2012.

 

Competition

 

The specialty retail industry is highly competitive and fragmented. We compete for customers with specialty retailers, luxury and premium multi-branded retailers, national apparel chains, vendor-owned proprietary boutiques, individual specialty apparel stores and direct-to-consumer marketing firms. 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 with us for distribution of luxury fashion brands include Saks Fifth Avenue, Nordstrom, Bloomingdale’s, Barneys New York, Net-a-Porter, vendor boutiques and other national, regional and local retailers.

 

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, 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 brand, diverse product selection, loyalty program, customer service, prime shopping locations and strong vendor relationships that allow us to offer the top merchandise from each vendor. Vendor-owned proprietary boutiques and specialty stores carry a much smaller selection of brands and merchandise, lack the overall shopping experience we provide and have a limited number of retail locations.

 

Employees

 

As of September 18, 2013, we had approximately 15,700 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—Executive Overview—Seasonality.”

 

Intellectual Property

 

We own certain tradenames and service marks, including the “Neiman Marcus” and “Bergdorf Goodman” 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.

 

ITEM 1A.     RISK FACTORS

 

Risks Related to Our Business and Industry

 

Economic conditions may impact demand for our merchandise.

 

Deterioration in domestic and global economic conditions leading to reductions in consumer spending have had a significant adverse impact on our business in the past. A number of factors affect the level of consumer spending on merchandise that we offer, including, among other things:

 

·                  general economic and industry conditions, including consumer confidence in future economic conditions;

 

·                  the performance of the financial, equity and credit markets;

 

·                  the level of consumer spending, debt and savings; and

 

·                  current and expected tax rates and policies.

 

The merchandise we sell consists of luxury retail goods. The purchase of these goods by customers is discretionary, and therefore highly dependent upon the level of consumer spending, particularly among affluent customers. During an actual or perceived economic downturn, fewer customers may shop with us and those who do shop may limit the amounts of their purchases. While economic conditions have improved since the severe downturn we experienced in calendar years 2008 and 2009, domestic and global economic conditions remain volatile. The recurrence of adverse economic conditions could have an adverse effect on our results of operations and continued growth.

 

If we significantly overestimate our future sales or fail to identify fashion trends and consumer shopping preferences correctly, our profitability may be adversely affected.

 

Our success depends in large part on our ability to identify fashion trends and consumer shopping preferences as well as to anticipate, gauge, and react to rapidly changing consumer demands in a timely manner. We make decisions regarding the purchase of our merchandise well in advance of the season in which it will be sold. For example, women’s

 

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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.

 

If our sales during any season 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 unsold inventory. If that occurs, we may be forced to rely on markdowns or promotional sales to dispose of excess inventory. This could have an adverse effect on our gross margins and operating earnings. Conversely, if we fail to purchase a sufficient quantity of merchandise, we may not have an adequate supply of products to meet consumer demand, thereby causing us to lose sales or adversely affect our customer relationships. Any failure on our part to anticipate, identify and respond effectively to changing consumer demands, fashion trends and consumer shopping preferences could adversely affect our results of operations.

 

The specialty retail industry is highly competitive.

 

The specialty 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, individual specialty apparel stores and online retailers. Many of our competitors have greater financial resources than we do.

 

Competition is strong in both the in-store and online channels to attract 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 and store and online ambiance. Our failure to compete successfully based on these and other factors may have an adverse effect on our results of operations.

 

Online retailing is rapidly evolving and we expect competition in online markets to intensify in the future. With the expansion of online retailing, we believe our overall business has become and will continue to become more complex. These changes have forced us to develop new expertise in response to the new challenges, risks and uncertainties inherent in the delivery of an integrated omni-channel retailing model. For example, we face the risk that our online operations might cannibalize a significant portion of our specialty retail store sales. Through our omni-channel strategy, we seek to attract as many new customers as possible to both channels. We also continually analyze our operating results and trends of our online and store channels, as well as the relationships between these channels, to maximize opportunities to drive incremental sales.

 

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

 

·                  competitive pricing strategies, including discounting of merchandise prices and/or the discounting or elimination of revenues collected for delivery and processing or other services;

 

·                  expansion of product or service offerings by existing competitors;

 

·                  entry by new competitors into markets in which we currently operate; and

 

·                  alteration of the distribution channels used by designers related to the sale of their goods to consumers.

 

Our business and performance may be affected by our ability to implement our expansion and growth strategies.

 

To maintain and grow our position as a leading luxury retailer, we must make ongoing investments to support our business goals and objectives. We make capital investments in our new and existing stores, websites, and distribution and support facilities as well as information technology. We also incur expenses for headcount, advertising and marketing, professional fees and other costs in support of our growth initiatives. Costs incurred in connection with our business goals and objectives require us to anticipate our customers’ needs, trends within our industry and our competitors’ actions. In addition, we must successfully execute the strategies identified to support our business goals and objectives. If we fail to identify appropriate business goals and objectives or if we fail to execute the actions required to accomplish these goals and objectives, our revenues, customer base and results of operations could be adversely affected.

 

New store openings involve certain risks, including constructing, furnishing and supplying a store in a timely and cost effective manner, accurately assessing the demographic or retail environment at a given location, negotiating favorable lease terms, hiring and training quality staff, obtaining necessary permits and zoning approvals, obtaining commitments from a core group of vendors to supply the new store, integrating the new store into our distribution network and building customer awareness and loyalty. We routinely evaluate the need to expand and/or remodel our existing stores. In undertaking store expansions or remodels, we must complete the expansion or remodel in a timely, cost effective manner, minimize

 

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disruptions to our existing operations and succeed in creating an improved shopping environment. Failure to execute on these or other aspects of our store expansion and remodeling strategy could adversely affect our revenues and results of operations.

 

Our online retailing operation represents a critical element of our omni-channel strategy and growth of that segment may replace, rather than be incremental to, our Specialty Retail Stores businesses. While we recognize that our online sales cannot be entirely incremental to sales through our retail specialty stores, we seek to attract as many new customers as possible to both our channels and if we are not successful in doing so, this could adversely affect our revenues 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 position as a retailer of high-fashion merchandise and a substantial portion of our revenues is attributable to our sales of designer merchandise. Many of our key vendors limit the number of retail channels they use to sell their merchandise. We have no guaranteed supply arrangements with our principal merchandising sources. Accordingly, we cannot assure you that such sources will continue to meet our quality, style and volume requirements. In addition, any decline in the quality or popularity of any of these designer brands could adversely affect our business.

 

Moreover, nearly all of the brands of our top designers are sold by competing retailers, and many of our top designers also have their own proprietary retail stores. In addition, virtually all of our designers currently make their merchandise available to us through wholesale arrangements. Some designers make their merchandise available to all or select retailers on a concession basis whereby the designer merchandises their boutique within the retailer’s store and pays the retailer a pre-determined percentage of the revenues derived from the sale of the designer’s merchandise by the retailer. In fiscal year 2013, less than 1% of our revenues represented concession revenues.

 

If one or more of our top designers were to 1) limit the supply of merchandise made available to us for resale through our stores on a wholesale basis, 2) increase the supply of merchandise made available to our competitors, 3) increase the supply of merchandise made available to their own proprietary retail stores or significantly increase the number of their proprietary retail stores, 4) convert the distribution of goods made available to us from our current wholesale arrangement to a concession arrangement or 5) exit the wholesale distribution of their goods to retailers, our business could be adversely affected.

 

During periods of adverse changes in general economic, industry or competitive conditions, such as we experienced in calendar years 2008 and 2009, some of our vendors may experience serious cash flow issues, reductions in available credit from banks, factors or other financial institutions, or increases in the cost of capital. In response, our 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 relationship with the vendor or constrain the amounts or timing of our purchases from the vendor and, ultimately, have an adverse effect on our revenues, results of operations and liquidity.

 

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 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 duties upon imports 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, those goods might be more expensive or of a different or inferior quality from the ones 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.

 

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 dollar or who price their merchandise in currencies other than the dollar. Fluctuations in the Euro-U.S. dollar exchange rate can affect us most significantly; however, we source goods from numerous countries and thus are affected by changes in numerous currencies and, generally, by fluctuations in the dollar relative to such currencies. Accordingly, changes in the value of the dollar relative to foreign currencies may increase the retail prices of goods offered for sale and/or increase our cost of goods sold.

 

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Further, we have experienced certain inflationary conditions in our cost base due to increases in selling, general and administrative expenses, particularly with regard to employee benefits, and increases in fuel prices and costs impacted by increases in fuel prices, such as freight and transportation costs. Inflation can harm our margins and profitability if we are unable to increase prices or cut costs to offset the effects of inflation in our cost base.

 

If our customers reduce their levels of spending in response to increases in retail prices and/or we are unable to pass cost increases to our customers, our revenues and profit margins may decrease. Accordingly, foreign currency fluctuations and inflation could have an adverse effect on our business and results of operations in the future.

 

We depend on the success of our advertising and marketing programs.

 

Our marketing and advertising costs, net of allowances, amounted to $126.9 million for fiscal year 2013. Our business depends on attracting an adequate 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. We cannot assure you as to our continued ability to execute effectively our advertising and marketing programs and any failure to do so could adversely affect our business and results of operations.

 

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. Approximately 40% of our total revenues in fiscal year 2013 were generated by our InCircle loyalty program members. 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.

 

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 operating results and manage our business. 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 and acts of war or terrorism.

 

To keep pace with changing technology, we must continuously implement new information technology systems as well as enhance our existing systems. The successful execution of some of our growth strategies is dependent on the design and implementation of new systems and technologies and/or the enhancement of existing systems, in particular the expansion of our omni-channel and online capabilities.

 

The reliability and capacity of our information systems is critical to our operations and the implementation of our growth initiatives. Any disruptions affecting our information systems, or delays or difficulties in implementing or integrating new systems, could have an adverse effect on our business, in particular our Online operation, and results of operations.

 

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 captured through both our proprietary credit card programs and our online activities. Our customers have a high expectation that we will adequately safeguard and protect their personal information. A significant breach of customer, employee or company data could damage our reputation and relationships with our customers and result in lost revenues, fines and lawsuits.

 

We outsource certain business processes to third party vendors, which subjects us to risks, including disruptions in business and increased costs.

 

We outsource some technology-related business 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 review outsourcing alternatives on a regular basis and may decide to outsource additional business processes in the future. Further, we depend on third party vendors for delivery of our products from manufacturers and to our customers. We try to ensure that all providers of outsourced services are observing proper internal control practices, such as redundant processing facilities; however, there are no guarantees that failures will not occur. Failure of third parties to provide adequate services could have an adverse effect on our results of operations or ability to accomplish our financial and management reporting.

 

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The loss of senior management or attrition among our buyers or key sales associates could adversely affect our business.

 

Our success in the specialty retail industry is dependent on our senior management team, buyers and key sales associates. We rely on the experience of our senior management and their specific knowledge relating to us and our industry would be difficult to replace. 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.

 

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 Financial Corporation (Capital One). Pursuant to an agreement with Capital One, which we refer to as the Program Agreement, Capital One currently offers credit cards and non-card payment plans.

 

Pursuant to the Program Agreement, we receive payments from Capital One based on sales transacted on our proprietary credit cards. We may receive additional payments based on the profitability of the portfolio as determined under the Program Agreement depending on a number of factors including credit losses. 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. 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 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 Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in July 2010, 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. 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 business.

 

We are subject to risks associated with owning and leasing substantial amounts of real estate.

 

We own or lease substantial property, 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, 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, we could be required to continue to operate 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 two to 121 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.

 

We are 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 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 addition, we could incur higher costs and longer lead times associated with the distribution of our products during the time it

 

16



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takes to reopen or replace a damaged facility. Any of the foregoing factors could adversely affect our business 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 products 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. For example, 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 sales and profitability. 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.

 

We are subject to numerous regulations that could affect our 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 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 changes in these laws, if these laws or the interpretations of these laws change without our knowledge, or are violated by importers, designers, manufacturers or distributors, we could experience delays in shipments and receipt of goods, 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.

 

If we are unable to enforce our intellectual property rights, or if we are accused of infringing on a third party’s intellectual property rights, our business or results of operations may be adversely affected.

 

We and our subsidiaries currently own our tradenames and service marks, including the “Neiman Marcus” and “Bergdorf Goodman” marks. Our tradenames and service marks are registered in the United States and in various foreign countries. The laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. The loss or reduction of any of our significant 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 tradename or other proprietary rights, whether or not the claims have merit. Claims like these could be time consuming and expensive to defend and we could be required to cease using the tradename or other rights or sell the allegedly infringing products. This could have an adverse effect on our business or results of operations and cause us to incur significant litigation costs and expenses.

 

Risks Related to Our Indebtedness

 

Our significant leverage could adversely affect our ability to fund our operations and prevent us from meeting our obligations under our indebtedness.

 

We are significantly leveraged. As of August 3, 2013, the principal amount of our total indebtedness was approximately $2,700.0 million (including $15.0 million of borrowings outstanding under our Asset-Based Revolving Credit Facility). In addition, as of August 3, 2013, we had $615.0 million of unused borrowing availability under our $700.0 million Asset-Based Revolving Credit Facility and no outstanding letters of credit.

 

The Future Sponsors’ Acquisition, if successfully completed, is expected to result in substantial new indebtedness, in part in replacement of existing indebtedness.

 

Our current indebtedness, as well as anticipated future indebtedness to be incurred in connection with the Future Sponsors’ Acquisition, combined with our lease and other financial obligations and contractual commitments, could adversely affect our business, financial condition and results of operations by:

 

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·                  making it more difficult for us to satisfy our obligations with respect to our indebtedness, including restrictive covenants and borrowing conditions, which may lead to an event of default under agreements governing our debt;

 

·                  making us more vulnerable to adverse changes in general economic, industry and competitive conditions and government regulation;

 

·                  requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of cash flows to fund current operations and future growth;

 

·                  exposing us to the risk of increased interest rates as our borrowings under our senior secured credit facilities are at variable rates;

 

·                  limiting our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business and growth strategies or other purposes; and

 

·                  limiting our ability to obtain credit from our vendors and other financing sources on acceptable terms or at all.

 

We may be able to incur substantial additional indebtedness in the future, subject to the restrictions contained in our senior secured credit facilities and the indenture governing our 2028 Debentures. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.

 

Additional financing, if required, may not be available on commercially reasonable terms, if at all. In addition, our ability to borrow under our Asset-Based Revolving Credit Facility is subject to significant conditions, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Senior Secured Asset-Based Revolving Credit Facility.”

 

Significant amounts of cash are required to service our indebtedness, and any failure to meet our debt service obligations could adversely affect our business, financial condition and results of operations.

 

Our ability to pay interest on and principal of the debt obligations will primarily depend upon our future operating performance. As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect our ability to make these payments.

 

If we do not generate sufficient cash flow from operations to satisfy the debt service obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our indebtedness, selling of assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt 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 restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on acceptable terms.

 

Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations at all or on commercially reasonable terms, could have an adverse effect on our future business, financial condition and results of operations.

 

Our debt agreements contain restrictions that may limit our flexibility in operating our business.

 

Neiman Marcus Group LTD Inc. is a holding company and, accordingly, substantially all of our operations are conducted through NMG. The credit agreements governing our senior secured credit facilities and the indenture governing the 2028 Debentures contain, and any future indebtedness would 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 best long-term interests. The credit agreements governing the senior secured credit facilities include covenants that, among other things, restrict our and our subsidiaries’ ability to:

 

·                  incur additional indebtedness;

 

·                  pay dividends on capital stock or redeem, repurchase or retire capital stock or indebtedness;

 

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·                  make investments;

 

·                  engage in transactions with affiliates;

 

·                  sell assets, including capital stock of subsidiaries;

 

·                  consolidate or merge;

 

·                  create liens; and

 

·                  enter into sale and lease back transactions.

 

A breach of any of the restrictive covenants in the facilities described above may constitute an event of default, permitting the lenders to declare all outstanding borrowings under the relevant facility to be immediately due and payable or to enforce their security interest. Agreements governing our indebtedness also contain cross-default provisions, under which a declaration of default under a credit facility would result in an event of default under the 2028 Debentures, which in turn may lead to mandatory redemption or repayment of such instruments in full.

 

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.

 

Risks Related to Our Organization and Structure

 

Because NMG accounts for substantially all of our operations, we are subject to all risks applicable to NMG and dependent upon NMG’s distributions to us.

 

Neiman Marcus Group LTD Inc. is a holding company and, accordingly, substantially all of our operations are conducted through NMG and its subsidiaries. As a result, we depend on the distribution of earnings, loans or other payments by our subsidiaries to us and are subject to all risks applicable to NMG and to limitations on the ability of NMG and its subsidiaries to make such distributions, including under the terms of our senior credit facilities and applicable law.

 

We are indirectly owned and controlled by the Principal Stockholders and their interests may conflict with those of our creditors and other stakeholders.

 

We are indirectly owned and controlled by the Principal Stockholders and, upon consummation of the Future Sponsors’ Acquisition, we will be indirectly owned and controlled by our Future Sponsors.  The interests of the Principal Stockholders (and Future Sponsors subsequent to the consummation of the Future Sponsors’ Acquisition) may not in all cases be aligned with those of our creditors and other stakeholders.  For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of the Principal Stockholders (and Future Sponsors subsequent to the consummation of the Future Sponsors’ Acquisition) might conflict with our creditors’ interests.  In addition, the Principal Stockholders (and Future Sponsors subsequent to the consummation of the Future Sponsors’ Acquisition) may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to holders of our indebtedness and other stakeholders.  Furthermore, the Principal Stockholders (and Future Sponsors subsequent to the consummation of the Future Sponsors’ Acquisition) may in the future own businesses that directly or indirectly compete with us.  One or more of the Principal Stockholders (and Future Sponsors subsequent to the consummation of the Future Sponsors’ Acquisition) also 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 corporate headquarters are located at the Downtown Neiman Marcus store location in Dallas, Texas.  Other operating headquarters are located as follows:

 

Neiman Marcus Stores

 

Dallas, Texas

Bergdorf Goodman Stores

 

New York, New York

Last Call

 

Dallas, Texas

Online

 

Irving, Texas

 

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 September 18, 2013, 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

 

855,000

 

2,362,000

 

2,315,000

 

5,532,000

 

Bergdorf Goodman Stores

 

 

 

316,000

 

316,000

 

Last Call Stores and Other

 

 

 

989,000

 

989,000

 

Distribution, Support and Office Facilities

 

1,330,000

 

150,000

 

1,336,000

 

2,816,000

 

 

Neiman Marcus Stores.  As of September 18, 2013, we operated 41 Neiman Marcus stores, with an aggregate total property size of approximately 5,532,000 square feet.  The following table sets forth certain details regarding each Neiman Marcus store:

 

Neiman Marcus Stores

 

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(3)

 

1976

 

144,000

 

Honolulu, Hawaii(3)

 

1999

 

181,000

 

Fort Worth, Texas(2)

 

1977

 

119,000

 

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

 

119,000

 

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

 

102,000

 

Chicago, Illinois (Michigan Ave.)(2)

 

1984

 

188,000

 

Topanga, 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

 

 

 

 

 

 

 

 


(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:

 

Bergdorf Goodman 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.

*              Mortgaged to secure our senior secured credit facilities and the 2028 Debentures.

 

Last Call Stores.  As of September 18, 2013, we operated 36 Last Call stores that average approximately 26,000 square feet each in size.

 

Distribution, Support and Office Facilities.  We own approximately 41 acres of land in Longview, Texas, where our primary distribution facility is located.  The Longview facility is the principal merchandise processing and distribution facility for Neiman Marcus stores.  In the spring of 2013, we opened a new 198,000 square feet distribution facility in Pittston, Pennsylvania to support the future growth and initiatives of the Company.  The new facility in Pittston replaced the distribution facility we previously utilized in Dayton, New Jersey.  We lease four regional service centers in New York, Florida, Texas 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 utilize another regional distribution facility in Dallas, Texas to support our Online operation.

 

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 two to 121 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 10-year renewal option.  Most leases provide for monthly fixed 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 16 of the Notes to Consolidated Financial Statements in Item 15.

 

ITEM 3.     LEGAL PROCEEDINGS

 

On April 30, 2010, a Class Action Complaint for Injunction and Equitable Relief was filed in the United States District Court for the Central District of California by Sheila Monjazeb, individually and on behalf of other members of the general public similarly situated, against the Company, Newton Holding, LLC, TPG Capital, L.P. and Warburg Pincus, LLC.  On July 12, 2010, all defendants except for the Company were dismissed without prejudice, and on August 20, 2010, this case was refiled in the Superior Court of California for San Francisco County.  This complaint, along with a similar class action lawsuit originally filed by Bernadette Tanguilig in 2007, alleges that the Company has engaged in various violations of the California Labor Code and Business and Professions Code, including without limitation 1) asking employees to work “off the clock,” 2) failing to provide meal and rest breaks to its employees, 3) improperly calculating deductions on paychecks delivered to its employees and 4) failing to provide a chair or allow employees to sit during shifts.  On October 24, 2011, the court granted the Company’s motion to compel Ms. Monjazeb and a co-plaintiff to participate in the Company’s Mandatory Arbitration Agreement, foreclosing a class action in that case.  The court then determined that Ms. Tanguilig could not represent employees who are subject to our Mandatory Arbitration Agreement, thereby limiting the putative class action to those associates who were employed between December 2004 and July 15, 2007 (the effective date of our Mandatory Arbitration Agreement).  Ms. Monjazeb filed a demand for arbitration as a class action, which is prohibited under the Mandatory Arbitration Agreement. In response to Ms. Monjazeb’s demand for arbitration as a class action, the American Arbitration Association (AAA) referred the resolution of such request back to the arbitrator.  We filed a motion to stay the decision of the AAA pending a ruling by the trial court; the trial court determined that the arbitration agreement was unenforceable due to a recent California case.  We asserted that the trial court does not have jurisdiction to change its earlier determination of the enforceability of the arbitration agreement and appealed the court’s decision to the court of appeals.  In addition, the National Labor Relations Board (NLRB) has issued a complaint alleging that the Mandatory Arbitration

 

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Agreement’s class action prohibition violates employees’ rights to engage in concerted activity, which is being submitted to the administrative law judge in late September for determination, unless the NLRB in Washington, D.C., dismisses the matter entirely based upon our previous settlement of the issues surrounding the 2007 Arbitration Agreement with the NLRB.  We will continue to vigorously defend our interests in these matters.  Currently, we cannot reasonably estimate the amount of loss, if any, arising from these matters.  We will continue to evaluate these matters based on subsequent events, new information and future circumstances.

 

We are currently involved in various other legal actions and proceedings that arose in the ordinary course of business.  With respect to the matter described above as well as all other current outstanding litigation involving the Company, we believe that any liability arising as a result of such litigation will not have a material adverse effect on our financial position, results of operations or cash flows.

 

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

 

Holders.  There is no established public trading market for our common stock.  At September 18, 2013, there were 32 holders of record of our common stock.

 

Dividends.  On March 28, 2012, the Board of Directors of NMG declared a cash dividend (the 2012 Dividend) of $435 per share of its outstanding common stock resulting in total distributions to our stockholders and certain option holders (including related expenses) of $449.3 million.  The 2012 Dividend was paid on March 30, 2012 to stockholders of record at the close of business on March 28, 2012.  We did not declare or pay any dividends on our common stock in fiscal year 2011 and have not declared or paid any dividends on our common stock subsequent to the 2012 Dividend.

 

Issuer Purchases of Equity Securities.  There were no unregistered sales of our equity securities during the quarterly period ended August 3, 2013.

 

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ITEM 6.     SELECTED FINANCIAL DATA

 

The following selected financial data is qualified in entirety by our Consolidated Financial Statements (and the Notes thereto) contained in Item 15 and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.

 

 

 

Fiscal year ended

 

(in millions)

 

August 3,
2013 (1)

 

July 28,
2012

 

July 30,
2011

 

July 31,
2010

 

August 1,
2009

 

OPERATING RESULTS

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

4,648.2

 

$

4,345.4

 

$

4,002.3

 

$

3,692.8

 

$

3,643.3

 

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

 

2,995.4

 

2,794.7

 

2,589.3

 

2,417.6

 

2,537.5

 

Selling, general and administrative expenses (excluding depreciation)

 

1,057.8

 

1,016.9

 

934.3

 

887.3

 

882.0

 

Income from credit card program

 

(53.4

)

(51.6

)

(46.0

)

(59.1

)

(50.0

)

Depreciation and amortization

 

188.9

 

180.2

 

194.9

 

215.1

 

223.5

 

Operating earnings (loss)

 

446.4

 

403.6

 

329.7

 

231.8

 

(652.9

)(4)

Earnings (loss) before income taxes

 

277.4

(2)

228.3

 

49.3

(3)

(5.3

)

(888.5

)

Net earnings (loss)

 

$

163.7

(2)

$

140.1

 

$

31.6

(3)

$

(1.8

)

$

(668.0

)

 

(in millions, except per share data)

 

August 3,
2013 (1)

 

July 28,
2012

 

July 30,
2011

 

July 31,
2010

 

August 1,
2009

 

FINANCIAL POSITION

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (5)

 

$

136.7

 

$

49.3

 

$

321.6

 

$

421.0

 

$

323.4

 

Merchandise inventories

 

1,018.8

 

939.8

 

839.3

 

790.5

 

766.8

 

Total current assets

 

1,286.0

 

1,143.7

 

1,302.7

 

1,360.1

 

1,234.5

 

Property and equipment, net

 

901.8

 

894.5

 

873.2

 

905.8

 

992.7

 

Total assets

 

5,300.2

 

5,201.9

 

5,364.8

 

5,532.3

 

5,594.0

 

Total current liabilities

 

776.7

 

725.2

 

662.2

 

662.5

 

576.4

 

Long-term debt, excluding current maturities

 

2,697.1

 

2,781.9

 

2,681.7

 

2,879.7

 

2,954.2

 

Cash dividends per share

 

$

 

$

435.0

 

$

 

$

 

$

 

 

 

 

Fiscal year ended

 

(in millions, except number of stores and sales
per square foot)

 

August 3,
2013 (1)

 

July 28,
2012

 

July 30,
2011

 

July 31,
2010

 

August 1,
2009

 

OTHER OPERATING DATA

 

 

 

 

 

 

 

 

 

 

 

Net capital expenditures (6)

 

$

139.3

 

$

142.2

 

$

83.7

 

$

44.3

 

$

91.5

 

Depreciation expense

 

141.5

 

130.1

 

132.4

 

141.8

 

150.8

 

Rent expense and related occupancy costs

 

96.7

 

91.9

 

87.6

 

85.0

 

85.4

 

Change in comparable revenues (7)

 

4.9

%

7.9

%

8.1

%

(0.1

)%

(21.4

)%

Number of full-line stores open at period end

 

43

 

44

 

43

 

43

 

42

 

Sales per square foot (8)

 

$

552

 

$

535

 

$

505

 

$

466

 

$

475

 

 

 

 

 

 

 

 

 

 

 

 

 

NON-GAAP FINANCIAL MEASURE

 

 

 

 

 

 

 

 

 

 

 

EBITDA (9)

 

$

635.3

 

$

583.8

 

$

524.7

 

$

446.9

 

$

(429.4

)(4)

EBITDA as a percentage of revenues

 

13.7

%

13.4

%

13.1

%

12.1

%

(11.8

)%

 


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

 

(2)                                 For fiscal year 2013, earnings before income taxes and net earnings include a loss on debt extinguishment of $15.6 million, which included 1) costs of $10.7 million related to the tender for and redemption of our Senior Subordinated Notes and 2) the write-off of $4.9 million of debt issuance costs related to the extinguished debt facilities.  The total loss on debt extinguishment was recorded as a component of interest expense.

 

(3)                                 For fiscal year 2011, earnings before income taxes and net earnings include a loss on debt extinguishment of $70.4 million, which included 1) costs of $37.9 million related to the tender for and redemption of our Senior Notes and 2) the write-off of $32.5 million of debt issuance costs related to the extinguished debt facilities. The total loss on debt extinguishment was recorded as a component of interest expense.

 

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(4)                                 For fiscal year 2009, operating loss and EBITDA include pretax impairment charges related to 1) $329.7 million for the writedown to fair value of goodwill, 2) $343.2 million for the writedown to fair value of the net carrying value of tradenames and 3) $30.3 million for the writedown to fair value of the net carrying value of certain long-lived assets.  Excluding pretax impairment charges of $703.2 million, fiscal year 2009 Adjusted EBITDA was $273.8 million, or 7.5% of revenues.

 

(5)                                 On August 29, 2013, we made a voluntary prepayment of $126.9 million on our Senior Secured Term Loan Facility, which was funded by cash on hand and borrowings of $100.0 million under our Senior Secured Asset-Based Revolving Credit Facility.

 

(6)                                 Amounts are net of developer contributions of $7.2 million, $10.6 million, $10.5 million, $14.4 million and $10.0 million, respectively, for the periods presented.

 

(7)                                 Comparable revenues include 1) revenues derived from our retail stores open for more than fifty-two weeks, including stores that have been relocated or expanded and 2) revenues from our Online operation.  Comparable revenues exclude revenues of closed stores.  We closed our Neiman Marcus store in Minneapolis in January 2013.  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.

 

(8)                                 Sales per square foot are calculated as Neiman Marcus stores and Bergdorf Goodman stores net sales divided by weighted average square footage.  Weighted average square footage includes a percentage of year-end square footage for new and closed stores equal to the percentage of the year during which they were open.  Our small format stores (Last Call and CUSP) are not included in this calculation.  Sales per square foot for fiscal year 2013 are based on revenues for the fifty-two weeks ended July 27, 2013.

 

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

 

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

 

EXECUTIVE OVERVIEW

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited Consolidated Financial Statements and related notes.  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.  This discussion contains forward-looking statements.  Please see “—Other Matters—Factors That May Affect Future Results” for a discussion of the risks, uncertainties and assumptions relating to these statements.

 

Business Overview

 

We are a luxury, multi-branded, omni-channel fashion retailer conducting integrated store and online operations principally under the Neiman Marcus and Bergdorf Goodman brand names. We report our store operations as our Specialty Retail Stores segment and our direct-to-consumer operations as our Online segment.

 

We are currently a subsidiary of Newton Holding, LLC (Holding), which is controlled by the Principal Stockholders. Our operations are conducted through our wholly-owned subsidiary, The Neiman Marcus Group, Inc. (NMG). The Principal Stockholders acquired us in a leveraged transaction in October 2005 (the Acquisition).

 

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. This resulted in an extra week in fiscal year 2013 (the 53rd week). All references to fiscal year 2013 relate to the fifty-three weeks ended August 3, 2013, all references to fiscal year 2012 relate to the fifty-two weeks ended July 28, 2012 and all references to fiscal year 2011 relate to the fifty-two weeks ended July 30, 2011.

 

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On September 9, 2013, we entered into an Agreement and Plan of Merger (the Merger Agreement) with NM Mariposa Holdings, Inc. and Mariposa Merger Sub LLC, both of which are owned by an investment group consisting of investment funds affiliated with Ares Management LLC and Canada Pension Plan Investment Board (collectively, our Future Sponsors).  Under the Merger Agreement, we will be acquired for a purchase price based on a total enterprise value of $6.0 billion (the Future Sponsors’ Acquisition).  A portion of the purchase price will be used at closing to repay all amounts outstanding under our existing senior secured credit facilities.  The currently outstanding 7.125% Senior Debentures due 2028 are expected to remain outstanding immediately following the closing of the transaction in accordance with the terms of the indenture governing such debentures.  Consummation of the merger is subject to various conditions, including (i) the absence of a material adverse effect on the Company, as defined in the Merger Agreement, (ii) the expiration or termination of any applicable waiting period under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976 (which has now occurred) and (iii) the completion of the marketing period related to financing of the Future Sponsors’ Acquisition as provided for under the Merger Agreement.  We currently anticipate the closing date for the Future Sponsors’ Acquisition to occur in October or November 2013.

 

Summary of Operating Results

 

A summary of our operating results is as follows:

 

·                  Revenues - Our revenues for fiscal year 2013 were $4,648.2 million, an increase of 7.0% compared to fiscal year 2012. Revenues generated in the 53rd week were $61.9 million. Our revenues for fiscal year 2012 were $4,345.4 million, an increase of 8.6% as compared to fiscal year 2011.

 

Increases in comparable revenues by quarter for fiscal year 2013 are as follows:

 

 

 

Specialty
Retail Stores

 

Online

 

Total

 

First fiscal quarter

 

3.5

%

13.5

%

5.4

%

Second fiscal quarter

 

2.0

 

17.9

 

5.3

 

Third fiscal quarter

 

0.7

 

15.1

 

3.6

 

Fourth fiscal quarter

 

2.6

 

15.6

 

5.4

 

Total fiscal year 2013

 

2.2

 

15.7

 

4.9

 

 

Revenues in the 53rd week are not included in our calculations of comparable revenues.

 

For Specialty Retail Stores, our sales per square foot increased to $552 for the fifty-two weeks ended July 27, 2013 from $535 for the fifty-two weeks ended July 28, 2012.

 

·                  Cost of goods sold including buying and occupancy costs (excluding depreciation) (COGS) - COGS were 64.4% of revenues in fiscal year 2013, an increase of 0.1% of revenues compared to fiscal year 2012. The increase in COGS, as a percentage of revenues, was primarily due to 1) higher promotional costs and markdowns required in fiscal year 2013 as a result of lower than expected customer demand and 2) higher delivery and processing net costs from our Online operation, partially offset by 3) the leveraging of buying and occupancy costs and 4) the impact of the 53rd week which was comprised primarily of full-price sales.

 

At August 3, 2013, on-hand inventories totaled $1,018.8 million, an 8.4% increase from July 28, 2012. Inventories increased by approximately $41.5 million in the 53rd week as net receipts of Fall season merchandise exceeded sales consistent with our normal operating cycle. Based on our current inventory position, we will continue to closely monitor and align our inventory levels and purchases with anticipated customer demand.

 

·                  Selling, general and administrative expenses (excluding depreciation) (SG&A) - SG&A represented 22.8% of revenues in fiscal year 2013, a decrease of 0.6% of revenues compared to fiscal year 2012. The lower level of SG&A expenses, as a percentage of revenues, primarily reflects 1) lower current and long-term incentive compensation costs and 2) the leveraging of payroll and other costs on higher revenues, partially offset by 3) higher planned selling and online marketing costs incurred in connection with the continuing expansion of our e-commerce and omni-channel capabilities.

 

·                  Operating earnings - Total operating earnings in fiscal year 2013 were $446.4 million, or 9.6% of revenues, compared to $403.6 million, or 9.3% of revenues, in fiscal year 2012. Our operating earnings margin increased by 0.3% of revenues in fiscal year 2013 primarily due to:

 

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·                  lower SG&A expenses of 0.6% of revenues primarily driven by lower current and long-term incentive compensation costs; partially offset by

 

·                  an increase in COGS of 0.1% of revenues primarily due to higher promotional costs and markdowns; and

 

·                  our equity in losses from our investment in a foreign e-commerce retailer of 0.3% of revenues.

 

Estimated operating earnings generated in the 53rd week of fiscal year 2013 were $10.7 million.

 

·                  Liquidity - Net cash provided by our operating activities was $349.4 million in fiscal year 2013 compared to $259.8 million in fiscal year 2012. The increase in net cash provided by operating activities was primarily due to higher earnings and operational cash flows and lower working capital requirements. We held cash balances of $136.7 million at August 3, 2013 compared to $49.3 million at July 28, 2012. At August 3, 2013, we had $15.0 million of borrowings outstanding under the Asset-Based Revolving Credit Facility, no outstanding letters of credit and $615.0 million of unused borrowing availability.

 

·                  Outlook - While economic conditions continue to improve from levels experienced during the severe economic downturn in calendar years 2008 and 2009, consumer confidence and spending levels remain below historical peaks and we believe continue to be affected by a number of factors, including modest economic growth, a rising stock market, a slowly improving housing market, high unemployment levels and uncertainty regarding governmental spending and tax policies. As a result, we continue to plan our business to balance current business trends and conditions with our long-term initiatives and growth strategies. We believe the cash generated from our operations along with our cash balances and available sources of financing will enable us to meet our anticipated cash obligations, as well as to fund the investments associated with our growth strategies, during the next twelve months.

 

OPERATING RESULTS

 

Performance Summary

 

The following table sets forth certain items expressed as percentages of net revenues for the periods indicated.

 

 

 

Fiscal year ended

 

 

 

August 3,
2013 (a)

 

July 28,
2012

 

July 30,
2011

 

 

 

 

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

100.0

%

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

 

64.4

 

64.3

 

64.7

 

Selling, general and administrative expenses (excluding depreciation)

 

22.8

 

23.4

 

23.3

 

Income from credit card program

 

(1.1

)

(1.2

)

(1.1

)

Depreciation expense

 

3.0

 

3.0

 

3.3

 

Amortization of intangible assets

 

0.6

 

0.7

 

1.1

 

Amortization of favorable lease commitments

 

0.4

 

0.4

 

0.4

 

Equity in loss of foreign e-commerce retailer

 

0.3

 

 

 

Operating earnings

 

9.6

 

9.3

 

8.2

 

Interest expense, net

 

3.6

 

4.0

 

7.0

 

Earnings before income taxes

 

6.0

 

5.3

 

1.2

 

Income tax expense

 

2.4

 

2.0

 

0.4

 

Net earnings

 

3.5

%

3.2

%

0.8

%

 


(a)                                 Percentages relate to fiscal year 2013 which includes the operating results of the 53rd week.  Summary financial information with respect to the 53rd week of fiscal year 2013 is as follows:

 

(in millions)

 

Specialty
Retail

 

Online

 

Total

 

Revenues

 

$

47.5

 

$

14.4

 

$

61.9

 

Operating earnings

 

8.2

 

3.2

 

10.7

 

EBITDA

 

10.2

 

3.6

 

13.6

 

 

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Set forth in the following table is certain summary information with respect to our operations for the periods indicated.

 

 

 

Fiscal year ended

 

(in millions, except sales per square foot and number of stores)

 

August 3,
2013

 

July 28,
2012

 

July 30,
2011

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

Specialty Retail Stores

 

$

3,616.9

 

$

3,466.6

 

$

3,245.2

 

Online

 

1,031.3

 

878.8

 

757.1

 

Total

 

$

4,648.2

 

$

4,345.4

 

$

4,002.3

 

 

 

 

 

 

 

 

 

OPERATING EARNINGS

 

 

 

 

 

 

 

Specialty Retail Stores

 

$

411.4

 

$

391.2

 

$

344.9

 

Online

 

157.7

 

132.4

 

113.0

 

Corporate expenses

 

(62.2

)

(68.4

)

(65.7

)

Equity in loss of foreign e-commerce retailer

 

(13.1

)

(1.5

)

 

Amortization of intangible assets and favorable lease commitments

 

(47.4

)

(50.1

)

(62.5

)

Total

 

$

446.4

 

$

403.6

 

$

329.7

 

 

 

 

 

 

 

 

 

OPERATING PROFIT MARGIN

 

 

 

 

 

 

 

Specialty Retail Stores

 

11.4

%

11.3

%

10.6

%

Online

 

15.3

%

15.1

%

14.9

%

Total

 

9.6

%

9.3

%

8.2

%

 

 

 

 

 

 

 

 

CHANGE IN COMPARABLE REVENUES (1) 

 

 

 

 

 

 

 

Specialty Retail Stores

 

2.2

%

6.0

%

7.5

%

Online

 

15.7

%

16.1

%

11.0

%

Total

 

4.9

%

7.9

%

8.1

%

 

 

 

 

 

 

 

 

SALES PER SQUARE FOOT (2)

 

 

 

 

 

 

 

Specialty Retail Stores

 

$

552

 

$

535

 

$

505

 

 

 

 

 

 

 

 

 

STORE COUNT

 

 

 

 

 

 

 

Neiman Marcus and Bergdorf Goodman full-line stores:

 

 

 

 

 

 

 

Open at beginning of period

 

44

 

43

 

43

 

Opened during the period

 

 

1

 

 

Closed during the period

 

(1

)

 

 

Open at end of period

 

43

 

44

 

43

 

Last Call stores:

 

 

 

 

 

 

 

Open at beginning of period

 

33

 

30

 

28

 

Opened during the period

 

3

 

4

 

2

 

Closed during the period

 

 

(1

)

 

Open at end of period

 

36

 

33

 

30

 

 

 

 

 

 

 

 

 

NON-GAAP FINANCIAL MEASURE
EBITDA (3)

 

$

635.3

 

$

583.8

 

$

524.7

 

 


(1)                                 Comparable revenues include 1) revenues derived from our retail stores open for more than fifty-two weeks, including stores that have been relocated or expanded and 2) revenues from our Online operation.  Comparable revenues exclude revenues of closed stores.  We closed our Neiman Marcus store in Minneapolis in January 2013.  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.

 

(2)                                 Sales per square foot are calculated as Neiman Marcus stores and Bergdorf Goodman stores net sales divided by weighted average square footage.  Weighted average square footage includes a percentage of year-end square footage for new and closed stores equal to the percentage of the year during which they were open.  Our small format stores (Last Call and CUSP) are not included in this calculation.  The calculation of sales per square foot for fiscal year 2013 is based on revenues for the fifty-two weeks ended July 27, 2013.

 

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

 

Factors Affecting Our Results

 

Revenues.  We generate our revenues from the sale of high-end merchandise through our Specialty Retail Stores and our Online operation. 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 customers return goods previously purchased. We maintain reserves for anticipated sales returns primarily based 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 merchandise delivered to our customers.

 

Our revenues can be affected by the following factors:

 

·                  general economic conditions;

 

·                  changes in the level of consumer spending generally and, specifically, on luxury goods;

 

·                  our ability to acquire goods meeting customers’ tastes and preferences;

 

·                  changes in the level of full-price sales;

 

·                  changes in the level of promotional events conducted;

 

·                  changes in the level of delivery and processing revenues collected from our customers;

 

·                  our ability to successfully implement our expansion and growth strategies; and

 

·                  the rate of growth in internet revenues.

 

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 on the Consolidated Balance Sheets 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.

 

·                  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.

 

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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 $90.2 million, or 1.9% of revenues, in fiscal year 2013, $92.5 million, or 2.1% of revenues, in fiscal year 2012 and $87.5 million, or 2.2% of revenues, in fiscal year 2011. The amounts of vendor allowances we receive fluctuate based 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 2013, 2012 or 2011.

 

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 other actions taken by competitors;

 

·                  changes in delivery and processing costs and our ability to pass such costs onto the customer;

 

·                  changes in occupancy costs primarily associated with the opening of new stores or distribution facilities; and

 

·                  the amount of vendor reimbursements we receive during the fiscal year.

 

Selling, general and administrative expenses (excluding depreciation).  SG&A principally consists 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 selling, general and administrative expenses is variable in nature and is dependent on the revenues we generate.

 

Advertising costs consist primarily of 1) online marketing costs, 2) advertising costs incurred related to the production, printing and distribution of our print catalogs and the production of the photographic content for our websites and 3) print media costs for promotional materials mailed to our customers. 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. 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 aggregated approximately $55.0 million, or 1.2% of revenues, in fiscal year 2013, $53.1 million, or 1.2% of revenues, in fiscal year 2012 and $49.3 million, or 1.2% of revenues, in fiscal year 2011.

 

We also receive allowances from certain merchandise vendors in conjunction with compensation programs for employees who sell the vendor’s merchandise. These allowances are netted against the related compensation expense that we incur. Amounts received from vendors related to compensation programs were $72.2 million, or 1.6% of revenues, in fiscal year 2013, $65.1 million, or 1.5% of revenues, in fiscal year 2012 and $60.3 million, or 1.5% of revenues, in fiscal year 2011.

 

Changes in our selling, general and administrative expenses are affected primarily by the following factors:

 

·                  changes in the number of sales associates primarily due to new store openings and expansion of existing stores, including increased health care and related benefits expenses;

 

·                  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 Financial Corporation (Capital

 

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Table of Contents

 

One).  Pursuant to an agreement with Capital One, which we refer to as the Program Agreement, Capital One currently offers credit cards and non-card payment plans.

 

Pursuant to the Program Agreement, we receive payments (Program Income) from Capital One based on sales transacted on our proprietary credit cards.  We recognize Program Income when earned. In the future, the Program Income 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 historical 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 services we provide to Capital One.

 

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. Aggressive marketing activities designed to stimulate customer purchases, a lower level of markdowns and higher margins are characteristic of this quarter. The 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 the second fiscal quarter. However, due to the seasonal increase in revenues that occurs during the holiday season, the 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. Aggressive marketing activities designed to stimulate customer purchases, a lower level of markdowns and higher margins are again characteristic of this quarter. Revenues are generally the lowest in the 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 the third and fourth fiscal quarters compared to the other quarters.

 

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, inherent in the successful execution of our business plans is our ability both to predict the fashion trends that will be of interest to our customers and to anticipate future spending patterns of our customer base.

 

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 in the event of higher than anticipated demand for the fashion goods we offer or a higher than anticipated level of consumer spending. Conversely, in the event we buy fashion goods that are not accepted by the customer or the level of consumer spending is less than we anticipated, we typically incur a higher than anticipated level of markdowns, net of vendor allowances, resulting in lower operating profits. We believe that the experience of our merchandising and selling organizations helps to minimize the inherent risk in predicting fashion trends.

 

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Fiscal Year Ended August 3, 2013 Compared to Fiscal Year Ended July 28, 2012

 

Revenues.  Our revenues for fiscal year 2013 of $4,648.2 million increased by $302.8 million, or 7.0%, from $4,345.4 million in fiscal year 2012. The increase in revenues was due to increases in comparable revenues resulting from a higher level of customer demand, most notably in our Online segment, and revenues generated in the 53rd week of fiscal year 2013. New stores generated revenues of $41.2 million for the fifty-two weeks ended July 27, 2013 while revenues for the 53rd week were $61.9 million.

 

Comparable revenues for the fifty-two weeks ended July 27, 2013 were $4,545.1 million compared to $4,331.8 million in fiscal year 2012, representing an increase of 4.9%. Changes in comparable revenues, by quarter and by reportable segment, were:

 

 

 

Fiscal year 2013

 

Fiscal year 2012

 

 

 

Specialty
Retail Stores

 

Online

 

Total

 

Specialty
Retail Stores

 

Online

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First fiscal quarter

 

3.5

%

13.5

%

5.4

%

6.4

%

15.2

%

8.0

%

Second fiscal quarter

 

2.0

 

17.9

 

5.3

 

7.8

 

13.5

 

9.0

 

Third fiscal quarter

 

0.7

 

15.1

 

3.6

 

4.3

 

17.5

 

6.7

 

Fourth fiscal quarter

 

2.6

 

15.6

 

5.4

 

5.3

 

18.8

 

7.9

 

Total fiscal year

 

2.2

 

15.7

 

4.9

 

6.0

 

16.1

 

7.9

 

 

Cost of goods sold including buying and occupancy costs (excluding depreciation).  COGS for fiscal year 2013 was 64.4% of revenues compared to 64.3% of revenues for fiscal year 2012. The increase in COGS of 0.1% of revenues in fiscal year 2013 was primarily due to:

 

·                  decreased product margins of approximately 0.1% of revenues due to higher promotional costs and markdowns as a result of lower than expected customer demand; and

 

·                  higher delivery and processing net costs of approximately 0.1% of revenues as a result of lower revenues collected from our customers; partially offset by

 

·                  the leveraging of buying and occupancy costs on higher revenues by 0.1% of revenues; and

 

·                  the improvement in product margins related to the impact of the 53rd week revenues, comprised primarily of full-price sales, of approximately 0.1% of revenues.

 

Selling, general and administrative expenses (excluding depreciation).  SG&A expenses as a percentage of revenues decreased to 22.8% of revenues in fiscal year 2013 compared to 23.4% of revenues in fiscal year 2012. The decrease in SG&A expenses by 0.6% of revenues in fiscal year 2013 was primarily due to:

 

·                  favorable payroll and other costs of approximately 0.4% of revenues primarily due to the leveraging of these expenses on higher revenues;

 

·                  lower current incentive compensation costs of approximately 0.3% of revenues; and

 

·                  adjustments of long-term incentive compensation costs of approximately 0.2% of revenues; partially offset by

 

·                  higher planned selling and online marketing costs of approximately 0.2% of revenues incurred in connection with the continuing expansion of our e-commerce and omni-channel capabilities.

 

Income from credit card program.  We earned credit card Program Income of $53.4 million, or 1.1% of revenues, in fiscal year 2013 compared to $51.6 million, or 1.2% of revenues, in fiscal year 2012.

 

Depreciation and amortization expenses.  Depreciation expense was $141.5 million, or 3.0% of revenues, in fiscal year 2013 compared to $130.1 million, or 3.0% of revenues, in fiscal year 2012.

 

Amortization of intangible assets (primarily customer lists and favorable lease commitments) aggregated $47.4 million, or 1.0% of revenues, in fiscal year 2013 compared to $50.1 million, or 1.1% of revenues, in fiscal year 2012. The decrease in amortization expense is primarily due to certain short-lived intangible assets becoming fully amortized.

 

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Equity in loss of foreign e-commerce retailer.  In the third quarter of fiscal year 2012, we made a strategic investment in a foreign e-commerce retailer. This investment is accounted for under the equity method and our equity in the investee’s loss was $13.1 million, or 0.3% of revenues, in fiscal year 2013.

 

Operating earnings.  Total operating earnings in fiscal year 2013 were $446.4 million, or 9.6% of revenues, compared to $403.6 million, or 9.3% of revenues, in fiscal year 2012. Our operating earnings margin increased by 0.3% of revenues in fiscal year 2013 primarily due to:

 

·                  lower SG&A expenses of 0.6% of revenues primarily driven by lower current and long-term incentive compensation costs; partially offset by

 

·                  an increase in COGS of 0.1% of revenues primarily due to higher promotional costs and markdowns; and

 

·                  our equity in losses from our investment in a foreign e-commerce retailer of 0.3% of revenues.

 

Segment operating earnings.  Segment operating earnings for our Specialty Retail Stores and Online segments do not reflect either the impact of adjustments to revalue our assets and liabilities to estimated fair value at the Acquisition Date or impairment charges related to declines in fair value subsequent to the Acquisition. The reconciliation of segment operating earnings to total operating earnings is as follows:

 

 

 

Fiscal year ended

 

 

 

August 3,

 

July 28,

 

(in millions)

 

 2013

 

2012

 

 

 

 

 

 

 

Specialty Retail Stores

 

$

411.4

 

$

391.2

 

Online

 

157.7

 

132.4

 

Corporate expenses

 

(62.2

)

(68.4

)

Equity in loss of foreign e-commerce retailer

 

(13.1

)

(1.5

)

Amortization of intangible assets and favorable lease commitments

 

(47.4

)

(50.1

)

Total operating earnings

 

$

446.4

 

$

403.6

 

 

Operating earnings for our Specialty Retail Stores segment were $411.4 million, or 11.4% of Specialty Retail Stores revenues, in fiscal year 2013 compared to $391.2 million, or 11.3% of Specialty Retail Stores revenues, for the prior fiscal year. The increase in operating margin as a percentage of revenues for our Specialty Retail Stores segment was primarily due to:

 

·                  lower SG&A expenses primarily due to lower current incentive compensation costs; partially offset by

 

·                  decreased product margins as a result of higher promotional costs and markdowns.

 

Operating earnings for our Online segment were $157.7 million, or 15.3% of Online revenues, in fiscal year 2013 compared to $132.4 million, or 15.1% of Online revenues, for the prior fiscal year. The increase in operating margin as a percentage of revenues for our Online segment was primarily the result of:

 

·                  leveraging of buying and occupancy costs and SG&A expenses, net of investments in marketing expenses to support our growth strategies, on the higher level of revenues; partially offset by

 

·                  lower product margins as a result of higher promotional costs and markdowns;

 

·                  higher delivery and processing net costs as a result of lower revenues collected from our customers; and

 

·                  higher depreciation expense.

 

Interest expense.  Net interest expense was $169.0 million, or 3.6% of revenues, in fiscal year 2013 and $175.2 million, or 4.0% of revenues, for the prior fiscal year. Excluding the $15.6 million loss on debt extinguishment, net interest expense decreased by $21.9 million in fiscal year 2013 primarily attributable to the effects of the Refinancing Transactions (defined herein) executed in the second quarter of fiscal year 2013. The significant components of interest expense are as follows:

 

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Fiscal year ended

 

 

 

August 3,

 

July 28,

 

(in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Asset-Based Revolving Credit Facility

 

$

1,453

 

$

1,052

 

Senior Secured Term Loan Facility

 

108,489

 

98,989

 

2028 Debentures

 

9,004

 

8,906

 

Senior Subordinated Notes

 

19,031

 

51,873

 

Amortization of debt issue costs

 

8,404

 

8,457

 

Other, net

 

7,214

 

7,040

 

Capitalized interest

 

(237

)

(1,080

)

 

 

$

153,358

 

$

175,237

 

Loss on debt extinguishment

 

15,597

 

 

Interest expense, net

 

$

168,955

 

$

175,237

 

 

Income tax expense.  Our effective income tax rate for fiscal year 2013 was 41.0% compared to 38.7% for fiscal year 2012.  Our effective income tax rates exceeded the federal statutory rate primarily due to:

 

·                  state income taxes; and

 

·                  the lack of a U.S. tax benefit related to the losses from our investment in a foreign e-commerce retailer in fiscal year 2013.

 

We file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. During the second quarter of fiscal year 2013, the Internal Revenue Service (IRS) began its audit of our fiscal year 2010 and 2011 income tax returns and closed its audit of our fiscal year 2008 and 2009 income tax returns. With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for fiscal years before 2008. We believe our recorded tax liabilities as of August 3, 2013 are sufficient to cover any potential assessments to be made by the IRS or other taxing authorities upon the completion of their examinations 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 additional adjustments in the amounts of our unrecognized tax benefits could occur within the next twelve months as a result of settlements with tax authorities or expiration of statutes of limitation. At this time, we do not believe such adjustments will have a material impact on our Consolidated Financial Statements.

 

Fiscal Year Ended July 28, 2012 Compared to Fiscal Year Ended July 30, 2011

 

Revenues.  Our revenues for fiscal year 2012 of $4,345.4 million increased by $343.1 million, or 8.6%, from $4,002.3 million in fiscal year 2011. The increase in revenues was due to increases in comparable revenues resulting from a higher level of customer demand. New stores generated revenues of $27.6 million in fiscal year 2012.

 

Comparable revenues for fiscal year 2012 were $4,317.8 million compared to $4,000.7 million in fiscal year 2011, representing an increase of 7.9%. Changes in comparable revenues, by quarter and by reportable segment, were:

 

 

 

Fiscal year 2012

 

Fiscal year 2011

 

 

 

Specialty

 

 

 

 

 

Specialty

 

 

 

 

 

 

 

Retail Stores

 

Online

 

Total

 

Retail Stores

 

Online

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First fiscal quarter

 

6.4

%

15.2

%

8.0

%

5.1

%

12.8

%

6.4

%

Second fiscal quarter

 

7.8

 

13.5

 

9.0

 

6.0

 

6.3

 

6.0

 

Third fiscal quarter

 

4.3

 

17.5

 

6.7

 

8.3

 

16.1

 

9.7

 

Fourth fiscal quarter

 

5.3

 

18.8

 

7.9

 

11.0

 

11.0

 

11.0

 

Total fiscal year

 

6.0

 

16.1

 

7.9

 

7.5

 

11.0

 

8.1

 

 

Cost of goods sold including buying and occupancy costs (excluding depreciation).  COGS for fiscal year 2012 was 64.3% of revenues compared to 64.7% of revenues for fiscal year 2011. The decrease in COGS by 0.4% of revenues for fiscal year 2012 was primarily due to:

 

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·                  increased product margins of approximately 0.4% of revenues driven by favorable merchandise mix, higher levels of full-price sales and lower net markdowns and promotions costs, primarily attributable to our Specialty Retail Stores segment; and

 

·                  the leveraging of buying and occupancy costs by 0.2% of revenues on higher revenues; partially offset by

 

·                  higher delivery and processing net costs of 0.3% of revenues from our Online segment.

 

Selling, general and administrative expenses (excluding depreciation).  SG&A expenses as a percentage of revenues increased to 23.4% of revenues in fiscal year 2012 compared to 23.3% of revenues in fiscal year 2011. The net increase in SG&A expenses by 0.1% of revenues in fiscal year 2012 was primarily due to:

 

·                  higher marketing and selling costs of approximately 0.3% of revenues primarily due to higher web marketing expenditures at our Online segment; partially offset by

 

·                  favorable payroll and other costs, net of costs incurred in connection with our corporate initiatives, of approximately 0.3% of revenues, primarily due to the net leveraging of these expenses on higher revenues.

 

Income from credit card program.  We earned credit card Program Income of $51.6 million, or 1.2% of revenues, in fiscal year 2012 compared to $46.0 million, or 1.1% of revenues, in fiscal year 2011. The increase in income from credit card program is primarily due to improvements in the overall profitability and performance of the credit card portfolio.

 

Depreciation expense.  Depreciation expense was $130.1 million, or 3.0% of revenues, in fiscal year 2012 compared to $132.4 million, or 3.3% of revenues, in fiscal year 2011. The decrease in depreciation expense resulted primarily from lower levels of capital expenditures in recent years.

 

Amortization expense.  Amortization expense of intangible assets (primarily customer lists and favorable lease commitments) aggregated $50.1 million, or 1.1% of revenues, in fiscal year 2012 compared to $62.5 million, or 1.6% of revenues, in fiscal year 2011. The decrease in amortization expense is primarily due to certain short-lived intangible assets becoming fully amortized.

 

Segment operating earnings.  Segment operating earnings for our Specialty Retail Stores and Online segments do not reflect either the impact of adjustments to revalue our assets and liabilities to estimated fair value at the Acquisition Date or impairment charges related to declines in fair value subsequent to the Acquisition Date. The reconciliation of segment operating earnings to total operating earnings is as follows:

 

 

 

Fiscal year ended

 

 

 

July 28,

 

July 30,

 

(in millions)

 

 2012

 

 2011

 

 

 

 

 

 

 

Specialty Retail Stores

 

$

391.2

 

$

344.9

 

Online

 

132.4

 

113.0

 

Corporate expenses

 

(68.4

)

(65.7

)

Equity in loss of foreign e-commerce retailer

 

(1.5

)

 

Amortization of intangible assets and favorable lease commitments

 

(50.1

)

(62.5

)

Total operating earnings

 

$

403.6

 

$

329.7

 

 

Operating earnings for our Specialty Retail Stores segment were $391.2 million, or 11.3% of Specialty Retail Stores revenues, for fiscal year 2012 compared to $344.9 million, or 10.6% of Specialty Retail Stores revenues, for the prior fiscal year. The increase in operating margin as a percentage of revenues for our Specialty Retail Stores segment was primarily due to:

 

·                  the leveraging of a significant portion of our expenses on the higher level of revenues; and

 

·                  increased margins due to higher levels of full-price sales and lower net markdowns and promotions costs.

 

Operating earnings for our Online segment were $132.4 million, or 15.1% of Online revenues, in fiscal year 2012 compared to $113.0 million, or 14.9% of Online revenues, for the prior fiscal year. The increase in operating margin as a percentage of revenues for our Online segment was primarily the result of:

 

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·                  the leveraging of a significant portion of our expenses on the higher level of revenues; partially offset by

 

·                  decreased margins primarily due to higher delivery and processing net costs, partially offset by favorable product margins; and

 

·                  higher marketing and selling costs.

 

Interest expense, net.  Net interest expense was $175.2 million, or 4.0% of revenues, in fiscal year 2012 and $280.5 million, or 7.0% of revenues, for the prior fiscal year. The net decrease in interest expense is primarily due to 1) the repurchase and redemption of our 9.0%/9.75% Senior Notes due 2015 (the Senior Notes) in the fourth quarter of fiscal year 2011, partially offset by 2) higher interest expense incurred on the higher Senior Secured Term Loan Facility borrowings. Additionally, we incurred a loss on debt extinguishment of $70.4 million in the fourth quarter of fiscal year 2011.

 

The significant components of interest expense are as follows:

 

 

 

Fiscal year ended

 

 

 

July 28,

 

July 30,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Asset-Based Revolving Credit Facility

 

$

1,052

 

$

 

Senior Secured Term Loan Facility

 

98,989

 

75,233

 

2028 Debentures

 

8,906

 

8,881

 

Senior Notes

 

 

53,916

 

Senior Subordinated Notes

 

51,873

 

51,732

 

Amortization of debt issue costs

 

8,457

 

14,661

 

Other, net

 

7,040

 

6,177

 

Capitalized interest

 

(1,080

)

(535

)

 

 

$

175,237

 

$

210,065

 

Loss on debt extinguishment

 

 

70,388

 

Interest expense, net

 

$

175,237

 

$

280,453

 

 

Income tax expense (benefit).  Our effective income tax rate for fiscal year 2012 was 38.7% compared to 35.8% for fiscal year 2011.  Our effective income tax rate for fiscal year 2012 and fiscal year 2011 exceeded the statutory rate primarily due to state income taxes and settlements with taxing authorities.

 

Non-GAAP Financial Measure — EBITDA and Adjusted EBITDA

 

We present the financial performance measures of earnings before interest, taxes, depreciation and amortization (EBITDA) and Adjusted EBITDA with respect to fiscal year 2009 because we use these measures to monitor and evaluate the performance of our business and believe the presentation of these measures will enhance investors’ ability to analyze trends in our business, evaluate our performance relative to other companies in our industry and evaluate our ability to service our debt.  EBITDA and Adjusted EBITDA are not prepared in accordance with generally accepted accounting principles in the United States (GAAP).  Our computations of EBITDA and Adjusted EBITDA may vary from others in our industry.  In addition, we use performance targets based on EBITDA as a component of the measurement of incentive compensation as described under “Executive Compensation — Compensation Discussion and Analysis — 2013 Executive Officer Compensation.”

 

The non-GAAP measures of EBITDA and Adjusted EBITDA contain some, but not all, adjustments that are taken into account in the calculation of the components of various covenants in the agreements governing our Senior Secured Asset-Based Revolving Credit Facility and Senior Secured Term Loan Facility.  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 prepared in accordance with, 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.  For example, EBITDA and Adjusted EBITDA:

 

·                  do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

·                  do not reflect changes in, or cash requirements for, our working capital needs;

 

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·                  do not reflect our considerable interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

·                  exclude tax payments that represent a reduction in available cash; and

 

·                  do not reflect any cash requirements for assets being depreciated and amortized that may have to be replaced in the future.

 

The following table reconciles net earnings as reflected in our Consolidated Statements of Earnings prepared in accordance with GAAP to EBITDA:

 

 

 

Fiscal year ended

 

 

 

August 3,

 

July 28,

 

July 30,

 

July 31,

 

August 1,

 

(dollars in millions)

 

2013

 

2012

 

2011

 

2010

 

2009

 

Net earnings (loss)

 

$

163.7

 

$

140.1

 

$

31.6

 

$

(1.8

)

$

(668.0

)(1)

Income tax expense (benefit)

 

113.7

 

88.3

 

17.7

 

(3.5

)

(220.5

)

Interest expense, net

 

169.0

 

175.2

 

280.5

 

237.1

 

235.6

 

Depreciation expense

 

141.5

 

130.1

 

132.4

 

141.8

 

150.8

 

Amortization of intangible assets and favorable lease commitments

 

47.4

 

50.1

 

62.5

 

73.3

 

72.7

 

EBITDA

 

$

635.3

 

$

583.8

 

$

524.7

 

$

446.9

 

$

(429.4

)(1)

EBITDA as a percentage of revenues

 

13.7

%

13.4

%

13.1

%

12.1

%

(11.8

)%

 


(1)                                 For fiscal year 2009, net loss and EBITDA include pretax impairment charges related to 1) $329.7 million for the writedown to fair value of goodwill, 2) $343.2 million for the writedown to fair value of the net carrying value of tradenames and 3) $30.3 million for the writedown to fair value of the net carrying value of certain long-lived assets.  Excluding pretax impairment charges of $703.2 million, fiscal year 2009 Adjusted EBITDA was $273.8 million, or 7.5% of revenues.

 

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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. In recent years, we have experienced certain inflationary conditions in our cost base due primarily to changes in foreign currency exchange rates that have reduced the purchasing power of the U.S. dollar and, to a lesser extent, to increases in selling, general and administrative expenses, particularly with regard to employee benefits, and increases in fuel prices and costs impacted by increases in fuel prices, such as freight and transportation costs.

 

We purchase a substantial portion of our inventory from foreign suppliers whose costs are affected by the fluctuation of their local currency against the dollar or who price their merchandise in currencies other than the dollar. Fluctuations in the Euro-U.S. dollar exchange rate affect us most significantly; however, we source goods from numerous countries and thus are affected by changes in numerous currencies and, generally, by fluctuations in the U.S. dollar relative to such currencies. Accordingly, changes in the value of the dollar relative to foreign currencies may increase the retail prices of goods offered for sale and/or increase our cost of goods sold. If our customers reduce their levels of spending in response to increases in retail prices and/or we are unable to pass such cost increases to our customers, our revenues, gross margins, and ultimately our earnings, could decrease. Foreign currency fluctuations could have a material adverse effect on our business, financial condition and results of operations in the future.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash requirements consist principally of:

 

·                  the funding of our merchandise purchases;

 

·                  debt service requirements;

 

·                  capital expenditures for expansion and growth strategies, including new store construction, store renovations 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 on hand, availability under the Asset-Based Revolving Credit Facility and vendor payment terms. The amounts of cash on hand 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 second quarters of each fiscal year as a result of higher seasonal levels of inventories. We have typically financed our cash requirements with available cash balances, cash flows from operations and, if necessary, with cash provided from borrowings under our credit facilities. We made a net $85.0 million repayment of outstanding borrowings under our Asset-Based Revolving Credit Facility in fiscal year 2013 and have outstanding borrowings of $15.0 million at August 3, 2013. On August 29, 2013, we made a voluntary prepayment of $126.9 million on our Senior Secured Term Loan Facility, which was funded by cash on hand and borrowings of $100.0 million under our Senior Secured Asset-Based Revolving Credit Facility.

 

We believe that operating cash flows, cash balances, available vendor payment terms and amounts available pursuant to the Asset-Based Revolving Credit Facility will be sufficient to fund our cash requirements through the end of fiscal year 2014, including merchandise purchases, anticipated capital expenditure requirements, debt service requirements, income tax payments and obligations related to our Pension Plan.

 

Cash and cash equivalents were $136.7 million at August 3, 2013 compared to $49.3 million at July 28, 2012, an increase of $87.4 million. Net cash provided by our operating activities was $349.4 million in fiscal year 2013 compared to $259.8 million in fiscal year 2012. Cash provided by operating activities increased primarily due to higher earnings and operational cash flows and lower working capital requirements.

 

Net cash used for investing activities, primarily representing capital expenditures, was $156.5 million in fiscal year 2013 compared to $182.3 million in fiscal year 2012. We incurred capital expenditures in both fiscal years 2013 and 2012

 

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Table of Contents

 

related to remodels of our Bergdorf Goodman and Bal Harbour stores and information technology enhancements. During fiscal year 2013, we also incurred capital expenditures for the renovation of our Michigan Avenue Neiman Marcus store (Chicago, Illinois) as well as for the construction of a distribution facility in Pittston, Pennsylvania. Currently, we project gross capital expenditures for fiscal year 2014 to be approximately $190 to $200 million. Net of developer contributions, capital expenditures for fiscal year 2014 are projected to be approximately $170 to $180 million.

 

Net cash used for financing activities was $105.4 million in fiscal year 2013 compared to a net cash used of $349.9 million in fiscal year 2012. Net cash used for financing activities in fiscal year 2013 reflects the impact of the Refinancing Transactions executed during the second quarter of fiscal year 2013. In connection with the Refinancing Transactions, we incurred incremental borrowings under the Senior Secured Term Loan Facility, as amended, of approximately $500.0 million. These proceeds, along with cash on hand, were used to repurchase or redeem the principal amount of the 10.375% Senior Subordinated Notes due 2015 (the Senior Subordinated Notes). Our payments to holders of the Senior Subordinated Notes in the tender offer and redemption (including transaction costs), taken together, aggregated approximately $510.7 million. In addition, we incurred debt issuance costs of approximately $9.8 million in connection with the Refinancing Transactions and the repricing amendment with respect to the Senior Secured Term Loan Facility. Net cash used for financing activities in fiscal year 2013 also included a net $85.0 million repayment of outstanding borrowings under our Asset-Based Revolving Credit Facility. Net cash used for financing activities in fiscal year 2012 reflects the net impact of the 2012 Dividend payment of $449.3 million in the third quarter of fiscal year 2012.

 

Financing Structure at August 3, 2013

 

Our major sources of funds have been comprised of vendor payment terms, a $700.0 million Asset-Based Revolving Credit Facility, $2,560.0 million Senior Secured Term Loan Facility, $125.0 million 2028 Debentures and operating leases.

 

In the second quarter of fiscal year 2013, we executed the following transactions, collectively referred to as the “Refinancing Transactions”:

 

·                  amended the Senior Secured Term Loan Facility to provide for the incurrence of an incremental term loan, increasing the principal amount of that facility to $2,560.0 million;

 

·                  repurchased or redeemed $500.0 million principal amount of Senior Subordinated Notes; and

 

·                  amended the Senior Secured Asset-Based Revolving Credit Facility to allow these transactions.

 

The purpose of the Refinancing Transactions was to lower our interest expense going forward by taking advantage of current market conditions and to extend the maturity of our indebtedness.

 

Senior Secured Asset-Based Revolving Credit Facility.  At August 3, 2013, we had a Senior Secured Asset-Based Revolving Credit Facility providing for a maximum committed borrowing capacity of $700.0 million (the Asset-Based Revolving Credit Facility). The Asset-Based Revolving Credit Facility matures on May 17, 2016 (or, if earlier, the date that is 45 days prior to the scheduled maturity of our Senior Secured Term Loan Facility, or any indebtedness refinancing it, unless refinanced as of that date). On August 3, 2013, we had $15.0 million of borrowings outstanding under this facility, no outstanding letters of credit and $615.0 million of unused borrowing availability.  On August 29, 2013, we made a voluntary prepayment of $126.9 million on our Senior Secured Term Loan Facility, which was funded by cash on hand and borrowings of $100.0 million under our Senior Secured Asset-Based Revolving Credit Facility.

 

Availability under the Asset-Based Revolving Credit Facility is subject to a borrowing base. The Asset-Based Revolving Credit Facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice. The borrowing base is equal to at any time the sum of (a) 90% of the net orderly liquidation value of eligible inventory, net of certain reserves, plus (b) 85% of the amounts owed by credit card processors in respect of eligible credit card accounts constituting proceeds from the sale or disposition of inventory, less certain reserves. NMG must at all times maintain excess availability of at least the greater of (a) 10% of the lesser of 1) the aggregate revolving commitments and 2) the borrowing base and (b) $50.0 million, but NMG is not required to maintain a fixed charge coverage ratio.

 

See Note 6 of the Notes to Consolidated Financial Statements in Item 15, which contains a further description of the terms of the Asset-Based Revolving Credit Facility.

 

Senior Secured Term Loan Facility.  In October 2005, we entered into a credit agreement and related security and other agreements for a $1,975.0 million Senior Secured Term Loan Facility (the Senior Secured Term Loan Facility). In May 2011, we entered into an amendment and restatement (the TLF Amendment) of the Senior Secured Term Loan Facility. The

 

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TLF Amendment increased the amount of borrowings to $2,060.0 million and extended the maturity of the loans to May 16, 2018. Loans that were not extended under the TLF Amendment were refinanced. The proceeds of the incremental borrowings under the term loan facility, along with cash on hand, were used to repurchase or redeem the $752.4 million principal amount outstanding of Senior Notes. The TLF Amendment also provided for an uncommitted incremental facility to request lenders to provide additional term loans, upon certain conditions, including that NMG’s secured leverage ratio (as defined in the TLF Amendment) is less than or equal to 4.50 to 1.00 on a pro forma basis after giving effect to the incremental loans and the use of proceeds thereof.

 

In November 2012, we entered into a further amendment to the Senior Secured Term Loan Facility in order to provide for the incurrence of an incremental term loan, increasing the principal amount of that facility to $2,560.0 million. The incremental term loan under the Senior Secured Term Loan Facility bears interest under the same terms as the previously existing Senior Secured Term Loan Facility and has the same maturity. The proceeds of the incremental borrowing, along with cash on hand, were used to repurchase or redeem the $500.0 million principal amount outstanding of Senior Subordinated Notes.

 

On February 8, 2013, we entered into a repricing amendment with respect to the Senior Secured Term Loan Facility. The amendment provided for (a) an immediate reduction in the interest rate margin applicable to the loans outstanding under the Senior Secured Term Loan Facility from 1) 3.50% to 3.00% for LIBOR borrowings and 2) 2.50% to 2.00% for base rate borrowings, (b) an immediate lowering of the LIBOR floor for loans outstanding under the Senior Secured Term Loan Facility from 1.25% to 1.00% and (c) the borrowing of incremental term loans, the proceeds of which were used to repay the outstanding loans of lenders that did not consent to the repricing amendment (the Non-Consenting Lenders) in an aggregate principal amount of approximately $99.6 million, which is the amount of loans held by such Non-Consenting Lenders on February 8, 2013.

 

At August 3, 2013, the outstanding balance under the Senior Secured Term Loan Facility was $2,560.0 million. On August 29, 2013, we made a voluntary prepayment of $126.9 million on our Senior Secured Term Loan Facility, which was funded by cash on hand and borrowings of $100.0 million under our Senior Secured Asset-Based Revolving Credit Facility. The principal amount of the loans outstanding is due and payable in full on May 16, 2018.

 

Depending on its leverage ratio as defined in the credit agreement governing the Senior Secured Term Loan Facility, NMG could be required to prepay outstanding term loans from a certain portion of its annual excess cash flow, as defined in the credit agreement. The calculation of excess cash flow under the credit agreement includes net income, adjusted for non-cash charges, decreases in working capital and long-term accounts receivable and other adjustments, less the sum of the amount of non-cash credits included in computing net income, capital expenditures, debt principal repayments and other adjustments. The leverage ratio under the credit agreement is computed as a ratio of total indebtedness to EBITDA, as such terms are defined in the credit agreement, for the period of the most recently ended four full consecutive fiscal quarters. Required excess cash flow payments commence at 50% of NMG’s annual excess cash flow (which percentage will be reduced to 25% if NMG’s leverage ratio is equal to or less than 5.0 to 1.0 but greater than 4.5 to 1.0 and will be reduced to 0% if NMG’s leverage ratio is equal to or less than 4.5 to 1.0). NMG also must offer to prepay outstanding term loans at 100% of the principal amount to be prepaid, plus accrued and unpaid interest, with the proceeds of certain asset sales under certain circumstances.

 

See Note 6 of the Notes to Consolidated Financial Statements in Item 15, which contains a further description of the terms of the Senior Secured Term Loan Facility.

 

2028 Debentures.  We have outstanding $125.0 million aggregate principal amount of 7.125% 2028 Debentures. Our 2028 Debentures mature on June 1, 2028 (the 2028 Debentures).

 

See Note 6 of the Notes to Consolidated Financial Statements in Item 15, which contains a further description of the terms of the 2028 Debentures.

 

Interest Rate Caps.  At August 3, 2013, we had outstanding floating rate debt obligations of $2,575.0 million. We have entered into interest rate cap agreements which cap LIBOR at 2.50% for an aggregate notional amount of $1,000.0 million from December 2012 through December 2014 in order to hedge the variability of our cash flows related to a portion of our floating rate indebtedness. In the event LIBOR is less than 2.50%, we will pay interest at the lower LIBOR rate. In the event LIBOR is higher than 2.50%, we will pay interest at the capped rate of 2.50%.

 

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Contractual Obligations and Commitments

 

The following table summarizes our estimated significant contractual cash obligations at August 3, 2013:

 

 

 

Payments Due by Period

 

 

 

 

 

Fiscal

 

Fiscal

 

Fiscal

 

Fiscal Year

 

 

 

 

 

Year

 

Years

 

Years

 

2019 and 

 

(in thousands)

 

Total

 

2014

 

2015-2016

 

2017-2018

 

Beyond

 

Contractual obligations:

 

 

 

 

 

 

 

 

 

 

 

Senior Secured Asset-Based Revolving Credit Facility

 

$

15,000

 

$

 

$

15,000

 

$

 

$

 

Senior Secured Term Loan Facility (1)

 

2,560,000

 

 

 

2,560,000

 

 

2028 Debentures

 

125,000

 

 

 

 

125,000

 

Interest requirements (2)

 

720,000

 

111,600

 

236,100

 

284,800

 

87,500

 

Lease obligations

 

915,200

 

61,900

 

118,500

 

106,200

 

628,600

 

Minimum pension funding obligation (3)

 

82,800

 

 

 

37,200

 

45,600

 

Other long-term liabilities (4)

 

74,600

 

6,500

 

13,700

 

15,000

 

39,400

 

Construction and purchase commitments (5)

 

1,382,300

 

1,332,700

 

49,600

 

 

 

 

 

$

5,874,900

 

$

1,512,700

 

$

432,900

 

$

3,003,200

 

$

926,100

 

 


(1)                                 The above table does not reflect future excess cash flow prepayments, if any, that may be required under the Senior Secured Term Loan Facility.

 

(2)                                 The cash obligations for interest requirements reflect 1) interest requirements on our fixed-rate debt obligations at their contractual rates and 2) interest requirements on floating rate debt obligations at rates in effect at August 3, 2013 (including the impact, if any, of our current interest rate cap agreements).  Borrowings pursuant to the Senior Secured Term Loan Facility bear interest at floating rates, primarily based on LIBOR, but in no event less than a floor rate of 1.00%, plus applicable margins.  As a consequence of the LIBOR floor rate, we estimate that a 1% increase in LIBOR would not significantly impact our annual interest requirements during fiscal year 2014.

 

(3)                                 At August 3, 2013 (the most recent measurement date), our actuarially calculated projected benefit obligation for our Pension Plan was $489.8 million and the fair value of the assets was $385.8 million resulting in a net liability of $104.0 million, which is included in other long-term liabilities at August 3, 2013.  Our policy is to fund the Pension Plan at or above the minimum amount required by law.  We made voluntary contributions to our Pension Plan of $25.0 million in fiscal year 2013 and $29.3 million in fiscal year 2012.  As of August 3, 2013, we do not believe we will be required to make contributions to the Pension Plan for fiscal year 2014.

 

(4)                                 Included in other long-term liabilities at August 3, 2013 are our liabilities for our SERP and Postretirement Plans aggregating $109.7 million.  Our scheduled obligations with respect to our SERP Plan and Postretirement Plan liabilities consist of expected benefit payments through 2023, as currently estimated using information provided by our actuaries.  Also included in other long-term liabilities at August 3, 2013 are our liabilities related to 1) uncertain tax positions (including related accruals for interest and penalties) of $9.0 million and 2) other obligations aggregating $29.0 million, primarily for employee benefits.  Future cash obligations related to these liabilities are not currently estimable.

 

(5)                                 Construction commitments relate primarily to obligations pursuant to contracts for the construction of new stores and the renovation of existing stores expected as of August 3, 2013.  These amounts represent the gross construction costs and exclude developer contributions of approximately $53.0 million, which we expect to receive pursuant to the terms of the construction contracts.

 

In the normal course of our business, we issue purchase orders to vendors/suppliers for merchandise.  Our purchase orders are not unconditional commitments but, rather represent executory contracts requiring performance by the vendors/suppliers, including the delivery of the merchandise prior to a specified cancellation date and the compliance with product specifications, quality standards and other requirements.  In the event of the vendor’s failure to meet the agreed upon terms and conditions, we may cancel the order.

 

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The following table summarizes the expiration of our other significant commercial commitments outstanding at                August 3, 2013:

 

 

 

Amount of Commitment by Expiration Period

 

 

 

 

 

Fiscal

 

Fiscal

 

Fiscal

 

Fiscal Year

 

 

 

 

 

Year

 

Years

 

Years

 

2019 and

 

(in thousands)

 

Total

 

2014

 

2015-2016

 

2017-2018

 

Beyond

 

Other commercial commitments:

 

 

 

 

 

 

 

 

 

 

 

Senior Secured Asset-Based Revolving Credit Facility (1)

 

$

700,000

 

$

 

$

700,000

 

$

 

$

 

Surety bonds

 

5,066

 

4,901

 

165

 

 

 

 

 

$

705,066

 

$

4,901

 

$

700,165

 

$

 

$

 

 


(1)                                 As of August 3, 2013, we had $15.0 million of borrowings outstanding under our Senior Secured Asset-Based Revolving Credit Facility, no outstanding letters of credit and $615.0 million of unused borrowing availability.  Our working capital requirements are greatest in the first and second fiscal quarters as a result of higher seasonal requirements.  See “—Financing Structure at August 3, 2013—Senior Secured Asset-Based Revolving Credit Facility” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality.”

 

In addition to the items presented above, our other principal commercial commitments are comprised of common area maintenance costs, tax and insurance obligations and contingent rent payments.

 

We had no off-balance sheet arrangements, other than operating leases entered into in the normal course of business, during fiscal year 2013.

 

OTHER MATTERS

 

Factors That May Affect Future Results

 

Matters discussed in this Annual Report on Form 10-K include forward-looking statements.  Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “plan,” “predict,” “expect,” “estimate,” “intend,” “would,” “could,” “should,” “anticipate,” “believe,” “project” or “continue.”  We make these forward-looking statements based on our expectations and beliefs concerning future events, as well as currently available data.  While we believe there is a reasonable basis for our forward-looking statements, they involve a number of risks and uncertainties.  Therefore, these statements are not guarantees of future performance and you should not place undue reliance 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.  Factors that could affect future performance include, but are not limited, to:

 

General Economic and Political Conditions

 

·                  weakness in domestic and global capital markets and other economic conditions and the impact of such conditions on our ability to obtain credit;

 

·                  general economic and political conditions or changes in such conditions including relationships between the United States and the countries from which we source our merchandise;

 

·                  economic, political, social or other events resulting in the short- or long-term disruption in business at our stores, distribution centers or offices;

 

Customer Considerations

 

·                  changes in consumer confidence resulting in a reduction of discretionary spending on goods;

 

·                  changes in the demographic or retail environment;

 

·                  changes in consumer preferences or fashion trends;

 

·                  changes in our relationships with customers due to, among other things, our failure to provide quality service and competitive loyalty programs, our inability to provide credit pursuant to our proprietary credit card

 

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arrangement or our failure to protect customer data or comply with regulations surrounding information security and privacy;

 

Industry and Competitive Factors

 

·                  competitive responses to our loyalty program, marketing, merchandising and promotional efforts or inventory liquidations by vendors or other retailers;

 

·                  changes in the financial viability of our competitors;

 

·                  seasonality of the retail business;

 

·                  adverse weather conditions or natural disasters, particularly during peak selling seasons;

 

·                  delays in anticipated store openings and renovations;

 

·                  our success in enforcing our intellectual property rights;

 

Merchandise Procurement and Supply Chain Considerations

 

·                  changes in our relationships with designers, vendors and other sources of merchandise, including changes in the level of goods and/or changes in the form in which such goods are made available to us for resale;

 

·                  delays in receipt of merchandise ordered due to work stoppages or other causes of delay in connection with either the manufacture or shipment of such merchandise;

 

·                  changes in foreign currency exchange or inflation rates;

 

·                  significant increases in paper, printing and postage costs;

 

Leverage Considerations

 

·                  the effects of incurring a substantial amount of indebtedness under our senior secured credit facilities;

 

·                  the ability to refinance our indebtedness under our senior secured credit facilities and the effects of any refinancing;

 

·                  the effects upon us of complying with the covenants contained in our senior secured credit facilities;

 

·                  restrictions on the terms and conditions of the indebtedness under our senior secured credit facilities may place on our ability to respond to changes in our business or to take certain actions;

 

Employee Considerations

 

·                  changes in key management personnel and our ability to retain key management personnel;

 

·                  changes in our relationships with certain of our buyers or key sales associates and our ability to retain our buyers or key sales associates;

 

Legal and Regulatory Issues

 

·                  changes in government or regulatory requirements increasing our costs of operations;

 

·                  litigation that may have an adverse effect on our financial results or reputation;

 

Other Factors

 

·                  terrorist activities in the United States and elsewhere;

 

·                  the impact of funding requirements related to our Pension Plan;

 

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