Saks’ gung-ho lenders are caught in a wholesale trap

Shuli Ren, Bloomberg

What’s the value of an iconic department store brand if the shelves are empty? Bond investors of Saks Global Enterprises, which has the glitzy Saks Fifth Avenue, Neiman Marcus and Bergdorf Goodman under its banners, will soon find out.

The cash-strapped luxury retailer is nearing a Chapter 11 bankruptcy filing after it skipped an interest payment of more than $100 million to bondholders due Dec. 30. Some existing lenders have discussed a so-called debtor-in-possession loan that may include about $750 million of new money just to allow the company to continue operating after it files for bankruptcy.

This won’t be the first time bondholders have had to prop up Saks. In December 2024, investors purchased $2.2 billion of junk-rated notes paying an 11% coupon, issued as part of Saks’ $2.7 billion acquisition of Neiman Marcus Group. The deal failed to create the luxury powerhouse many had hoped for, with both department stores losing customers to rivals including Bloomingdale’s and Nordstrom.

A controversial debt restructuring involving creditor-on-creditor violence followed. Last June, a group holding a slim majority agreed to provide Saks with an immediate $300 million loan, on the condition that it jump the repayment line if the company went bust. While this group managed to exchange their notes at par, those left out took haircuts of up to 30%. They improved their positions by reshuffling the corporate structure at the expense of minority investors.

Call it karma. The clever maneuver has backfired. The senior note that the majority group’s new cash injections exchanged into is trading at 31 cents, reflecting market skepticism over its recovery rate. Saks has more than $2.6 billion of bonds outstanding.

The Achilles’ heel is Saks’ precarious position with vendors. In early December, Hilldun Corp., which represents about 140 brands that sell to the retailer, said it would no longer back shipments to its department stores, raising doubts over what kind of products the outlets will have for the spring season.

While luxury powerhouses from Hermès International SCA to Chanel Ltd. run their own counters at Saks’ outlets — essentially leasing retail space and therefore insulated from the company’s financial woes — more contemporary and independent brands often rely on the wholesale model. Merchants ship products well in advance to fill Saks’ inventory and wait to be paid. Some labels say they have not been paid for more than a year; Jovani Fashion, a dressmaker and sponsor of the Miss America competition, has filed a lawsuit over unpaid bills, a rarity in a relationship-driven industry.

If Saks can’t repair its supply chain, one has to ask whether its brands have much value at all. Imagine walking into Neiman Marcus and still being able to buy a Louis Vuitton wallet, but no longer discovering newer labels or unexpected finds. That experience quickly becomes interchangeable. Shoppers might as well visit LVMH Moët Hennessy Louis Vuitton SE’s own stores instead.

Ironically, the most valuable item on Saks’ books is its real estate, estimated at $4.4 billion in net asset value by S&P Global. The company has recently sold land occupied by Neiman Marcus buildings in Beverly Hills and San Francisco to bridge liquidity needs.

Saks’ painful saga shows that retail can be a dangerous landmine even for seasoned financiers, who backed a multibillion-dollar acquisition and engineered an aggressive debt swap, only to end up scrambling for inventory and cash. In the high-yield world, investing in land often turns out to be safer than investing in brands. [Abridged]

Courtesy Bloomberg/Shuli Ren