Neiman Marcus files for bankruptcy protection, expecting to emerge in the fall

Neiman Marcus’ mountains of debt and stores closures because of the COVID-19 outbreak proved to be too much for the luxury department store company.

On Thursday, the storied Dallas-based luxe purveyor, which also owns New York’s Bergdorf Goodman emporium, filed for Chapter 11 bankruptcy protection in a pre-packaged arrangement with creditors that will significantly lower its debt load. The arrangement should give it more breathing room to weather the global pandemic and rebuild its business.

Neiman Marcus, whose pre-filing long term debt was $5.1 billion—a bit more than its total annual sales—had begun to see improvements in its business, but the pandemic that forced it to close its stores starting in March threw those turnaround ambitions off track.

“Prior to COVID-19, Neiman Marcus Group was making solid progress on our journey to long-term profitable and sustainable growth,” said Neiman Marcus chairman and CEO Geoffroy van Raemdonck.

The company has had to redirect hundreds of millions of dollars a year in interest on its debt rather than capital spending, even as rivals like Nordstrom have invested heavily in stores and e-commerce.

This new plan will help Neiman on that front. The bankruptcy filing in federal bankruptcy court in Houston will eliminate $4 billion of its debt, the legacy of two leveraged buyouts by private equity firms. The deal with creditors is subject to approval by the judge. Neiman’s creditors will become majority owners.

The company, which operates 43 department stores, is not planning any mass store closings, a spokesman told Fortune.

The filing comes three days after J.Crew, also a private equity owned, debt-laden fashion retailer, sought bankruptcy protection in a deal that turned its lenders into owners.

Neiman has secured $675 million debtor-in-possession financing—money that will allow it to keep operating while in Chapter 11 and pay vendors and employees—from creditors holding over two-thirds of the company’s debt. Those creditors have also committed to $750 million in exit financing. Neiman said it expects to emerge from bankruptcy protection in the fall.

Until then, Neiman is likely to face a tough haul. The company gets 36% of sales online, which helps. But only a few stores have reopened.

What’s more, the macro environment is brutal for the luxury world: Bain & Company on Thursday estimated global spending on personal luxury items could fall 20% to 35% in 2020. Neiman is vulnerable to the sharp drop in overseas tourism, as well as the weak oil markets which spur much of the luxury spending in Texas, where it has six stores.

In addition to an economic downturn, U.S. luxury department stores are also struggling with many shoppers preferring to buy directly from brands. Barneys New York liquidated its stores earlier this year, and this week, Nordstrom announced it was closing 14% of its full service department stores.

While Neiman Marcus is undoubtedly a viable business, it has a lot of work to do. For starters, it needs to renew its clientele. Neiman Marcus “relies on its older, more traditional customer base,” says Neil Saunders, managing director of GlobalData Retail.

And as Fortune wrote last month, Neiman Marcus will need to redefine what kind of luxury it stands for at a time many of the same brands are sold by its competitors. The shopping experience will have to adapt to new ways customers research products and purchase them.

More must-read retail coverage from Fortune:

—Bankruptcy gives J.Crew a chance to reinvent itself (again)
—How cannabis purveyors are coping during the pandemic
Vending machines—the original contactless delivery—now deliver ramen and art
—How luxury fashion shopping habits are shifting during the coronavirus pandemic
—Listen to Leadership Next, a Fortune podcast examining the evolving role of CEO
—WATCH: The ugly toll COVID-19 has taken on retail

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