D I S C U S S I O N M A T E R I A L S
Neiman Marcus: What should
the IPO price at?
Andrew Boone, CFA
N E I M A N M A R C U S
1
What does Neiman Marcus do?
OVERVIEW
 Neiman Marcus owns 43 full-line namesake stores (high end...
N E I M A N M A R C U S
2
IPO
OVERVIEW
 On June 24th, Neiman filed an S-1 with the SEC
 On Aug. 6th, Reuter's reported t...
N E I M A N M A R C U S
3
OVERVIEW
Neiman Marcus SWOT
Weaknesses
 Neiman's brand portfolio provides
exclusivity which cre...
N E I M A N M A R C U S
4
Benefits of targeting the wealthy
The rich continue to get richer: 1990-2010 US
household income...
N E I M A N M A R C U S
5
Neiman is an exclusive retailer
BRANDPORTFOLIO
Sales per square foot
Neiman's sustainable moat i...
N E I M A N M A R C U S
6
Neiman has a relationship with high end customers because of the exclusivity of the brands they ...
N E I M A N M A R C U S
7
The brick & mortar retail operation is the steady portion of the business
Number of Neiman and B...
N E I M A N M A R C U S
8
Long term debt
Neiman's repayment schedule
CAPITALSTRUCTURE
Comparable co.'s long term debt to L...
N E I M A N M A R C U S
9
What is Neiman worth?
COMPS
Neiman comp set1
 Neiman is the most elite luxury department store....
N E I M A N M A R C U S
10
Total revenue and online revenue
ONLINERETAIL
Online revenue as a percentage of total revenue
I...
N E I M A N M A R C U S
11
Recent ecommerce developments
 According to the WSJ, ecommerce represents 20-30% of Chinese re...
N E I M A N M A R C U S
12
What would Neiman be worth as an internet and brick &
mortar company?
SOTP
SOTP Multiples valua...
N E I M A N M A R C U S
13
What would Neiman be worth as an internet and brick &
mortar company?
INTERNETCOMPS
Internet Co...
N E I M A N M A R C U S
14
Discounted Cash Flow Model: $4.7bn
DCF
DCF Model
2010 2011 2012 2013 2014 2015 2016 2017 TV
Rev...
N E I M A N M A R C U S
15
DCF
Gross margin & cost of capital sensitivity analysis
Discounted Cash Flow Model: $4.7bn
 Sa...
N E I M A N M A R C U S
16
Range of enterprise values
VALUATION
Football field: EV
$3,806
$4,495
$4,511
$5,028
$4,886
$5,2...
N E I M A N M A R C U S
17
Risks
RISKS
 Online retailers increasingly encroach on Neiman's business lowering margins and
...
N E I M A N M A R C U S
18
The IPO should price at $1.9bn
CONCLUSION
 Neiman should price at $1.9bn
 This value implies ...
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Neiman Marcus IPO Valuation

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Neiman Marcus IPO Valuation

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Neiman Marcus IPO Valuation

  1. 1. D I S C U S S I O N M A T E R I A L S Neiman Marcus: What should the IPO price at? Andrew Boone, CFA
  2. 2. N E I M A N M A R C U S 1 What does Neiman Marcus do? OVERVIEW  Neiman Marcus owns 43 full-line namesake stores (high end), 2 Bergdorf Goodman stores (ultra high end), 35 Neiman Marcus Last Call stores (discount), & 6 CUSP stores (contemporary – middle tier)  Neiman Marcus stores are a collection of high end luxury boutiques rather than a traditional department store. This helps differentiate the customer experience and allows for a higher price point  Neiman operates ecommerce sites for Neiman Marcus, Bergdorf Goodman, Last Call, CUSP, & Horchow and ships to 100+ countries Neiman Marcus overview Source: Company filings
  3. 3. N E I M A N M A R C U S 2 IPO OVERVIEW  On June 24th, Neiman filed an S-1 with the SEC  On Aug. 6th, Reuter's reported that Credit Suisse, Bank of America, and JPMorgan have been appointed to lead the possible IPO  The company is currently owned by TPG Capital, Warburg Pincus, and Leonard Green & Partners, who are now looking to exit  TPG and Warbug Pincus took the company private in 2005 Neiman Marcus IPO Source: Company filings, Reuter's
  4. 4. N E I M A N M A R C U S 3 OVERVIEW Neiman Marcus SWOT Weaknesses  Neiman's brand portfolio provides exclusivity which creates a network effect  Neiman has a long standing relationship with the wealthy. For example, Neiman only began accepting Visa and MasterCard in 2011, opening the store to mid-tier shoppers (those without AmEx)  The wealthy are recession resistant shoppers with high discretionary spending Strengths ThreatsOpportunities  Neiman has JV'd with a company to create a Mandarin Neiman Marcus website. Luxury goods are frequently counterfeited in China, Neiman's entry in the market may lead to additional Asian brick & mortar stores and ecommerce sales  Develop and cultivate CUSP for middle tier shoppers using Neiman's relationship with higher end designers  Luxury/high end designers retailing their clothing directly to consumers through websites  Increased counterfeit items are entering the market, this degrades the value of high end luxury brands  Lack of middle market exposure creates a business model dependent on the wealthy's (predominantly women's) discretionary spending  Extremely low private label sales (~2% of rev) pressures margins
  5. 5. N E I M A N M A R C U S 4 Benefits of targeting the wealthy The rich continue to get richer: 1990-2010 US household income at select percentiles CUSTOMERS 2011 disposable income by household income bracket Neiman targets a growing and favorable customer base Source: Company filings, Experian, US Census  The North American luxury goods industry is expected to grow at an annual rate of 6.6% from 2012-2017  The global luxury goods industry is expected to grow at an annual rate of 7.2% from 2012-2017  According to the Pew Research Center, the average net worth of households in the upper 7% rose 28% from 2009 to 2011, while the remaining 93% experienced a fall of 4% 0 50,000 100,000 150,000 200,000 1990 1995 2000 2005 2010 10th percentile 20th percentile 50th (median) 80th percentile 90th percentile 95th percentile $5,590 $7,870 $12,800$14,400 $19,400 $30,200 $54,000 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000
  6. 6. N E I M A N M A R C U S 5 Neiman is an exclusive retailer BRANDPORTFOLIO Sales per square foot Neiman's sustainable moat is its relationship with luxury brand producers Source: Company filings, Bloomberg  The exclusivity of Neiman is driven by its brand portfolio  Neiman's sustainable moat is its portfolio of high end brands. Neiman's portfolio creates a network effect for high end brands. This causes new brands to strive to be sold at Neiman's because of the perceived value that a Neiman's buyer places on that brand by putting it amongst the other brands  The higher price points are best exhibited by Neiman's higher sales per square foot $438 $485 $545 $200 $250 $300 $350 $400 $450 $500 $550 $600 Saks Nordstroms Neiman
  7. 7. N E I M A N M A R C U S 6 Neiman has a relationship with high end customers because of the exclusivity of the brands they sell BRANDPORTFOLIO ~40% of Neiman's brands cannot be found at Saks, Nordstrom, nor Bloomingdales *available at Saks; + available at Nordstrom; ^available at Bloomingdales Source: Company filings, Company websites 1. Adam Lippes 2. Akris* 3. Akris punto*+ 4. Alexander McQueen*+^ 5. Alexander Wang+ 6. Altuzarra 7. Aquilano.Rimondi 8. Armani Collezioni*+^ 9. Belstaff 10. Bottega Veneta*+^ 11. Brunello Cucinelli* 12. Burberry+^ 13. Carolina Herrera*+^ 14. Chado Ralph Rucci 15. Chloe* 16. Christopher Kane*+ 17. Derek Lam* 18. Dolce & Gabbana* 19. Donna Karan*+^ 20. Dsquared2+ 21. Elie Saab+^ 22. Emilio Pucci*+^ 23. Erdem*+ 24. Escada^ 25. eskandar 26. Etro*+ 27. Fendi*+^ 28. Gareth Pugh 29. Giambattista Valli* 30. Giorgio Armani+^ 31. Gucci*+^ 32. Herve Leger*+ 33. J. Mendel 34. Jason Wu*+ 35. Jean Paul Gaultier*+^ 36. Jil Sander*+ 37. Jonathan Saunders 38. Kalinka 39. Karolina Zmarlak 40. Kaufman Franco 41. Lanvin+^ 42. Lela Rose+ 43. Loro Piana 44. Maison Martin Margiela* 45. Maison Rabih Kayrouz 46. Mantu 47. Marc Jacobs*+^ 48. Marni*+^ 49. Mary Katrantzou+ 50. Michael Kors*+^ 51. Missoni*+^ 52. Moncler*+^ 53. Monique Lhuillier 54. Naeem Khan+ 55. Narciso Rodriguez+^ 56. Nina Ricci*+ 57. Oscar de la Renta*+^ 58. Pamella Roland 59. Paule Ka 60. Peter Pilotto* 61. Piazza Sempione*+ 62. Proenza Schouler* 63. Ralph Lauren+^ 64. Reed Krakoff*+ 65. Rick Owens*+ 66. Roberto Cavalli*+^ 67. Roland Mouret 68. Saint Laurent*+ 69. St. John* 70. Stella McCartney*+^ 71. Talbot Runhof 72. Thakoon*+ 73. The Row* 74. Valentino*+^ 75. Vera Wang+^ 76. Versace+^ 77. Wes Gordon 78. Yves Saint Laurent+^ 79. Zac Posen*^
  8. 8. N E I M A N M A R C U S 7 The brick & mortar retail operation is the steady portion of the business Number of Neiman and Bergdorf stores RETAILSTORE Brick and mortar revenue Neiman's brick & mortar retail stores Source: Company filings, Bloomberg  The tailwind from the Great Recession has helped Neiman's same store sales and operating margins grow  There is less competition in high brick and mortar retail because of competitors' push towards the middle market. Nordstrom plans to double its Rack stores, while Saks already has 60% of its store portfolio in outlet formats.  As online expands in Asia there may be future opportunity to build brick and mortar stores in Asia (e.g., Hong Kong, Shanghai, Macau, etc.) $420 $440 $460 $480 $500 $520 $540 $560 $2,000 $3,000 $4,000 2010 2011 2012 Specialty Retail Store Revenue Sales per square foot 41 42 43 43 44 43 0 5 10 15 20 25 30 35 40 45 2008 2009 2010 2011 2012 Apr-13
  9. 9. N E I M A N M A R C U S 8 Long term debt Neiman's repayment schedule CAPITALSTRUCTURE Comparable co.'s long term debt to LTM EBITDA1 Neiman has an aggressive capital structure but has few required payments until 2018  Neiman has a debt to EBITDA ratio of 4.4x  Neiman has a minor payment in 2016 but must refinance the majority of its long term debt in 2018  This is a very aggressive capital structure for a department store because of lease payment obligations  Proceeds from the IPO will be used to buyout existing shareholders, not to pay down debt 0 0 0 20 0 2,560 122 0 500 1,000 1,500 2,000 2,500 3,000 2013 2014 2015 2016 2017 2018 2028 Asset based revolver Senior secured term loan 2028 debentures 0.7x 1.5x 1.7x 4.4x 0.0x 1.0x 2.0x 3.0x 4.0x 5.0x Saks Nordstroms Macy's Neiman 1As of 8/17/13 Source: Company filings, CapIQ
  10. 10. N E I M A N M A R C U S 9 What is Neiman worth? COMPS Neiman comp set1  Neiman is the most elite luxury department store. A modest premium is applied to median multiple of the comp group  Saks is trading at a small premium because of the recent offer by Hudson Bay (a 4.5% premium to the close before the offer)  The implied P/E multiple shows the consistency and validity of the comparables analysis Enterprise Value Revenue EBIT EBITDA EV/Revenue EV/EBIT EV/EBITDA Macy's $22,492 $27,878 $2,690 $3,730 0.81x 8.4x 6.0x Nordstroms $13,036 $12,462 $1,359 $1,801 1.05x 9.6x 7.2x Saks $2,610 $3,187 $145 $266 0.82x 18.0x 9.8x Average 0.89x 12.0x 7.7x Neiman $4,535 $428 $611 Implied Multiple 1.00x 10.5x 8.0x Enterprise Value $4,535 $4,495 $4,886 Net Debt (2,633) (2,633) (2,633) Market Cap $1,901 $1,862 $2,253 LTM Implied P/E 12.7x 12.4x 15.0x Comps commentary 1As of 8/17/13 Source: Company filings, CapIQ
  11. 11. N E I M A N M A R C U S 10 Total revenue and online revenue ONLINERETAIL Online revenue as a percentage of total revenue Internet sales will be an increasingly important part of Neiman Source: Company filings 0 1,000 2,000 3,000 4,000 5,000 2010 2011 2012 LTM Total revenue Online revenue 16.0% 17.0% 18.0% 19.0% 20.0% 21.0% 22.0% 2010 2011 2012 LTM
  12. 12. N E I M A N M A R C U S 11 Recent ecommerce developments  According to the WSJ, ecommerce represents 20-30% of Chinese retail sales. Among young shoppers this can be up to 50%  A PWC study found that more than 25% of consumers were driven online because they could not find the desired goods in a brick and mortar location  Frank Lavin, the founder of Export Now, a company that runs ecommerce stores in China for foreign companies, wrote, "Foreign firms do extremely well in the premium space, where quality oriented companies… can appeal to the more affluent customer." ONLINERETAIL  Neiman recently launched international shipping from its ecommerce site to over 100 countries  In Q3 2012, Neiman invested $29.4mm in Glamour Sales Holding Limited, an off-price flash sales website based in Hong Kong  Recently, Neiman increased its ownership to 44% and partnered with the company to launch a site in Mandarin targeting Chinese consumers  Neiman has a team now based in Shanghai, providing it a "feet on the ground" perspective Asian opportunity Internet sales will benefit from Neiman's expansion into China Source: Company filings, WSJ
  13. 13. N E I M A N M A R C U S 12 What would Neiman be worth as an internet and brick & mortar company? SOTP SOTP Multiples valuation *Corporate expenses were allocated evenly between the two divisions Source: Company filings, CapIQ Operating Earnings 2010 2011 2012 LTM Multiple Total Specialty Retail Stores 273 345 391 395 Amort of intangible assets & favorable leases (73) (63) (50) (48) Corporate expenses (40) (66) (68) (30) Adjusted brick & mortar op earnings 159 217 273 318 8.0x 2,542 Online 113 113 132 151 Equity in loss of foreign e-commerce retailer 0 0 (2) (10) Corporate expenses (40) (66) (68) (30) Adjusted online op earnings 73 47 63 110 25.0x 2,756 Total (EV value using EBIT multiples) 232 264 335 428 5,298 Net Debt (2,633) Equity Value 2,665 Brick and Motrar Revenue 3,011 3,245 3,467 3,550 Online Revenue 682 757 879 984 2.0x 1,969 Total 3,693 4,002 4,345 4,535 Brick and mortar value 2,542 EV 4,511 Net Debt (2,633) Equity Value 1,877
  14. 14. N E I M A N M A R C U S 13 What would Neiman be worth as an internet and brick & mortar company? INTERNETCOMPS Internet Comp Set1 Internet Comp Set Commentary  Using multiples that are at the low end of the range (25x EBIT or 2x sales) Neiman's enterprise value is $4.5bn – $5.3bn  These are not perfect comps for Neiman but they show the valuation premiums that are being attached to ecommerce retailers  While the retail side of the business receives a lower valuation, the premium that is attached to the internet side of the business more than makes up the difference ($2.5bn for the brick & mortar business and $2.0bn to 2.8bn for online - depending on the multiple - for a total of $4.5bn to $5.3bn) EV Rev 1 year Rev Growth EBIT EBIT Margin EBITDA EV/ Rev EV/ EBIT EV/ EBITDA Amazon 125,709 66,848 23.0% 638 1.0% 2,924 1.9x 197.0x 43.0x Groupon 5,212 2,417 17.9% 63 2.6% 133 2.2x 82.7x 39.2x RetailMeNot 1,615 156 80.0% 50 32.3% 64 10.4x 32.1x 25.2x Overstock 618 1,203 13.9% 21 1.7% 36 0.5x 29.9x 17.1x Neiman Online 984 17.2% 110 11.2% 1As of 8/17/13 Source: Company filings, CapIQ
  15. 15. N E I M A N M A R C U S 14 Discounted Cash Flow Model: $4.7bn DCF DCF Model 2010 2011 2012 2013 2014 2015 2016 2017 TV Revenue 3,693 4,002 4,345 4,609 4,823 5,061 5,326 5,621 5,845 Growth 1.4% 8.4% 8.6% 6.1% 4.7% 4.9% 5.2% 5.5% 4.0% Net credit card revenue 59 46 52 50 50 50 50 50 50 COGS (2,418) (2,589) (2,795) (2,978) (3,135) (3,290) (3,462) (3,653) (3,800) Gross profit 1,334 1,459 1,602 1,681 1,738 1,821 1,914 2,017 2,096 SG&A (887) (934) (1,017) (1,083) (1,133) (1,189) (1,252) (1,321) (1,374) D&A (215) (195) (180) (172) (167) (162) (156) (150) (90) Operating profit 232 330 405 425 438 470 507 547 632 Operating margin 6.3% 8.2% 9.3% 9.2% 9.1% 9.3% 9.5% 9.7% 10.8% Taxes 4 (18) (88) (116) (121) (133) (146) (161) (173) Non levered earnings 235 312 317 309 317 338 360 386 460 Working capital delta (60) (28) (34) (33) (37) (41) Depreciation 172 167 162 156 150 90 CapEx (135) (90) (90) (90) (90) (90) Free cash flow 286 366 376 393 408 TV 6,219 Discount factor 90.1% 81.2% 73.1% 65.9% 59.3% 53.5% Present value 258 297 275 259 242 3,325 Enterprise value 4,656
  16. 16. N E I M A N M A R C U S 15 DCF Gross margin & cost of capital sensitivity analysis Discounted Cash Flow Model: $4.7bn  Sales per square foot annual increase: $5  New Neiman/Bergdorf stores: 0  Annual net new Last Call stores: 2  Gross margin: 35%  SG&A as % of rev: 23.5%  Tax rate: 37%  Terminal growth rate: 4.0%  Cost of capital: 11%  Days of inventory outstanding: 120 days  Days payable outstanding: 42 days Cost of Capital 13.0% 12.5% 12.0% 11.5% 11.0% 10.5% 32.0% 2,682 2,843 3,024 3,230 3,465 3,738 33.0% 2,984 3,164 3,367 3,598 3,862 4,168 34.0% 3,285 3,485 3,710 3,966 4,259 4,598 35.0% 3,586 3,806 4,053 4,334 4,656 5,028 36.0% 3,888 4,127 4,396 4,702 5,053 5,458 37.0% 4,189 4,448 4,739 5,070 5,450 5,888 38.0% 4,490 4,769 5,082 5,438 5,846 6,318 Grossmargin Terminal growth & cost of capital sensitivity analysisAssumptions Cost of Capital 13.0% 12.5% 12.0% 11.5% 11.0% 10.5% 2.50% 3,197 3,365 3,551 3,758 3,990 4,252 3.00% 3,314 3,496 3,700 3,927 4,184 4,476 3.50% 3,443 3,642 3,866 4,118 4,404 4,732 4.00% 3,586 3,806 4,053 4,334 4,656 5,028 4.50% 3,747 3,990 4,266 4,581 4,946 5,373 5.00% 3,928 4,198 4,508 4,867 5,285 5,781 5.50% 4,133 4,437 4,789 5,200 5,686 6,271 Terminalgrowth
  17. 17. N E I M A N M A R C U S 16 Range of enterprise values VALUATION Football field: EV $3,806 $4,495 $4,511 $5,028 $4,886 $5,298 $2,000 $3,000 $4,000 $5,000 $6,000 DCF Traditional Comps SOTP Internet Comps
  18. 18. N E I M A N M A R C U S 17 Risks RISKS  Online retailers increasingly encroach on Neiman's business lowering margins and reducing sales  International shipping reduces margins (though the contribution margin would still likely be positive)  The exclusivity of Neiman's is tied to the exclusivity of the brands and designers sold at Neiman. If brands become less exclusive this lessens the exclusivity and allure of Neiman as well  Neiman's buyers do a poor job of refreshing clothing offerings  2018 debt payment is unable to be rolled over – this would bankrupt the company Risks
  19. 19. N E I M A N M A R C U S 18 The IPO should price at $1.9bn CONCLUSION  Neiman should price at $1.9bn  This value implies a price to earnings multiple of 12.7x, a EV to EBITDA multiple of 10.6x, and a 1.0x revenue to EV multiple  Neiman would trade at a slight premium to Nordstroms, Saks, and Macy's for EV/EBITDA and EV/Revenue but would trade at a discount for P/E1  The number of shares to be sold has not been released Conclusion 1As of 8/17/13

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