On Everything #107

On Everything is a weekly newsletter from Eugene Rabkin, our founder and editor.

The Coming Saks Bankruptcy

Saks Global, the parent of Saks Fifth Avenue and Neiman Marcus is in deep trouble. You wouldn’t know it from the charm offensive of its duck-feet-pedaling CEO Marc Metrick, who’s been making media rounds trying to reassure the industry that everything is peachy. But the reality is grim. For years things have not been rosy for America’s department stores. They have grown too big and too generic. Their growth came before e-commerce and mono-brand flagships of LVMH and Kering took away a big chunk of their revenue. Meanwhile, the department stores put too much stock in their brand name and too little in the actual business. Go to any American department store outside of New York and Los Angeles and you will see how dismal they look. The interior of Saks Fifth Avenue in Chicago resembles a TJ Maxx.

But Saks’s answer to its diminishing business was typical of American business hubris – bigger is better. Instead of closing non-performing stores and concentrating on jewels like its actual Fifth Avenue flagship, it chose to buy Neiman Marcus for a whopping $2.7 billion it did not have. They financed the deal that closed on December 24th, 2024 with $2 billion in debt at 11% interest – the dangerously high rate should have given investors pause, but instead the issuance was oversubscribed, giving Saks an additional $200 million to play with. But the future profits and dominant position in luxury retail that Saks Global promised to woo debt buyers is largely financial chicanery with dollops of wishful thinking. What looked like a Christmas present, quickly turned into fool’s gold. The bonds that Saks sold to finance the deal are now cheaper than the dresses on their seasonal sale. They have lost half of its value by now – that is $1 billion – and Saks is looking at $120 million dollar first debt payment by the end of June, money which by all reports it can only get by issuing more debt. There are also furious suppliers Saks needs to deal with that are awaiting payments totalling $275 million; some are holding up inventory until they get what the company owes them (needless to say, no inventory, so revenue).