How the CEO of Barneys Turned the Retailer Around

Discounted merchandise is now 9% of sales, instead of 15%.
February 23, 2016, 6:08 PM UTC
Photograph by Timothy A. Clary — AFP/Getty Images

Barneys New York opened a spanking new store last week, on the same Manhattan block its old flagship occupied for almost 75 years.

The luxe emporium is returning to its birthplace in the edgier Chelsea district of New York City after a nearly 19-year absence. But this isn’t just a move to get closer to the downtown customers who love Barneys but can’t be bothered to shop at its massive main store on tony Madison Avenue.

It also symbolizes a new ethos that has helped Barneys stage a remarkable comeback in the years since it endured a big liquidity scare caused by unrealistic expansion ambitions. Barneys’s new mindset helped it hit record revenues and gross profit margins last year and comparable sales growth six years running. The key to that ethos: understanding that it is a niche player within the luxury world and reducing its reliance on the discounts its upscale peers are all chasing.

The five-floor, 58,000 square-foot store, centered around a dramatic spiral staircase, embodies everything Barneys is striving to achieve under Mark Lee, its CEO since 2010: a high proportion of exclusive merchandise (33% vs a chain-wide average of 20% or so); a spare presentation; and services like a barber shop to make shopping there an outing.

Barneys, founded in 1923, made a name for itself by being more adventurous than the Saks Fifth Avenues and Bergdorf Goodmans of the world, serving as the launching pad for edgier brands like Dries Van Noten, Alaïa and Proenza Schouler over the years. Barneys wasn’t really for society ladies or portfolio managers so much as for leading-edge types,with its Chelsea store, for decades its only store, interwoven with New York’s downtown art and music communities.

Barneys Chelsea 2016 Photograph by Scott Frances

But about a decade ago, Barneys started opening stores in markets that turned out not to be big enough to support that sensibility (metro Phoenix is affluent, but hardly known as a leading edge fashion mecca), and the retailer lost some of what made Barneys different.

“We are in our own lane,” Lee told Fortune in an interview at the retailer’s offices in midtown Manhattan. “There’s no point otherwise. Our customer wants what’s different, a different experience and a different assortment.”

That will be key for Barneys to continue thriving in an increasingly crowded luxury market: in New York alone, later this year, Saks Fifth Avenue will open a second department store in the city, this one downtown, and Neiman Marcus and Nordstrom(JWN) in two years will each open their first Manhattan stores. Meanwhile Bergdorf (owned by Neiman) is undergoing a massive renovation.

When Barneys hired Lee, the former Gucci boss, in 2010, the retailer was a mess. It hadn’t had a CEO in two years, and in the wake of a leveraged buyout only a few years before it was swimming in $590 million in debt, a huge load for a company with annual sales of not even $1 billion. Then in 2012, relief came: its biggest lender, Perry Capital, a hedge fund operated by New York financier Richard Perry, led a group that erased most of Barneys debt in exchange for a majority stake.

To straighten out its business, on Lee’s watch, Barneys has closed almost half of its stores, a total of 23 locations, including some big stores like Dallas, as well as smaller stores in markets like Miami Beach and mall-based locations. And the company is not quite done with that pruning: its store in Scottsdale, Arizona will shutter its doors this spring. Now it still has 16 full price stores (some of which used to be called “Co-Ops,” a branding it ended three years ago, finding it too downmarket) and 11 outlet stores.

Lee called that housecleaning necessary to return Barneys to health. Though the privately held company won’t disclose specific financial results, the Business of Fashion blog recently reported Barneys revenues hit $900 million last year, citing market sources.

Lee told Fortune that comparable sales (which exclude recently closed stores) rose 6% annually from 2010 to 2014 before slipping to low single digits last year, when all luxury retailers were dealing with a strong U.S. dollar that was keeping international high rollers out. (Many retailers reported declines in “comps.”)

Barneys CEO Mark LeeCourtesy of Barneys New York

But here’s the data point that gets to the crux of Lee’s strategy: Barneys last year got 9% of revenue from its off-price business (Barneys Warehouse outlet stores and the related web site), down from 15% ten years ago, meaning it is a rare retailer successfully weaning customers off of discounting and retraining them to pay full price. (Lee cancelled Barneys’s iconic twice-annual warehouse sales, which have moved online.) It’s something Lee sees as crucial to protecting the luxury aura of the Barneys name.

Because of that strategy, Lee takes exception to Barneys being categorized as a department store.

“Please don’t call us a department store,” he says. “We are truly a modern luxury specialty store selling at full price and not discounting every day, with a very differentiated point of view.”

While it’s undeniable that many labels you can find at Barneys like Theory, Moncler and Acne Studios are also at Neiman, Nordstrom, Saks et al., he may have a point: those three department stores, as well as Macy’s Inc.’s (M) Bloomingdale’s, have expanded their discount outlet chains. There are growing concerns that the off price stores are hurting the department stores: Saks Fifth Avenue, Neiman and Nordstrom have reported declining comparable sales at their full service stores of late.

Instead, Barneys is betting that its place in the luxury world will be secured by standing out rather than going toe to toe with its much bigger rivals.

“Without the exclusives and without doing all these special things, Barneys is not going to mean anything,” says Daniella Vitale, Barneys’s chief operating officer. “Our customer expects something different.”

Which brings us back to the new Chelsea store, part of a $200 million program to improve its stores and expand its e-commerce (now 20% of sales, on par with Nordstrom, though below Neiman’s 27%.). It will boast a Fred’s restaurant and a Blind Barber Shop and have some exclusive merchandise from hot designers like Alexander Wang.

Lee says that only about 15% of the customers of the retailer’s 250,000 square-foot store at Madison and 60th Street live below 34th Street, a data point that told him there was still a vast market to be tapped in Barneys’s old stomping grounds. Chelsea is also home to the affluent High Line area as well as a tech hub. (Google’s New York offices are a block west of the store.)

Barneys Chelsea 1989 Barneys New York, Chelsea location, 1989 Courtesy of Barneys

But here, a new store is really about an untapped opportunity. Other than an upcoming men’s store in San Francisco adjacent to the Barneys there, don’t expect a big expansion. Barneys has been down that road before, and it led to disaster. Lee says growth will come primarily from e-commerce and its interaction with current stores: last year Barneys relaunched its e-commerce sites along with its The Window editorial website featuring magazine-style articles and photo layouts.

“Barneys is not about being everywhere,” says Lee. “It’s about being as Barneys as we can possibly be where it really matters.”

For more on luxury, watch this Fortune video:

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