Saks’ acquisition of Neiman Marcus led to bankruptcy

For more than a decade, the former Saks Global CEO had dreamed of adding Neiman Marcus to his collection of department stores, believing the combined entities would create a luxury force powerful enough to challenge the changes sweeping the industry.

Instead, Richard Baker’s $2.7 billion acquisition of Neiman Marcus in 2024 ultimately pushed the company into bankruptcy just over a year after the deal closed. From the beginning, the company was struggling to pay its bills — resulting in angry vendors and little room for error.

In a declaration filed Wednesday in bankruptcy court in Houston hours after Saks filed for Chapter 11 bankruptcy protection, chief restructuring officer Mark Weinsten wrote that the deal led to “immediate liquidity challenges” and created an “unsustainable” capital structure.

Micky Chadha, vice president of corporate finance at Moody’s, described it as a “recipe for disaster.”

“You had two companies that weren’t doing well, and then you merged the two companies and racked up a significant amount of debt,” Chadha said. “The capital structure has been unsustainable from the beginning.”

The deal, financed by $2.2 billion in junk bonds, brought an influx of cash. But once the deal closed and the two companies paid the debts related to the agreement, there was not enough money to pay the Saks sellers.

As invoices were late, sellers were less willing to send Saks inventory. The retailer soon lacked sufficient assortment to increase sales, which led to the situation deteriorating.

“This created inventory gaps that then drove away customers and caused revenue and cash generation to decline. This classic vicious spiral put the company in an unsustainable position,” retail analyst Neil Saunders, managing director of GlobalData, wrote in an email note.

“While the previous management team had always presented the merger as an opportunity to create a luxury powerhouse, behind the shiny façade the deal was a tangle of complex financial engineering that made it impossible for the group to implement its stated vision.”

With Neiman Marcus, Bergdorf Goodman and Saks Fifth Avenue under the new Saks Global umbrella, the company expects to see $600 million in run-rate synergies over the five years following the deal, Winston said. But soon after the deal was completed, Saks realized that integrating Neiman Marcus would be more difficult and expensive than expected.

Before last year’s critical shopping season, Saks was affected by “one-time merchandising system integration issues,” which disrupted inventory flows at Neiman Marcus and Bergdorf Goodman at a time when sales and inventory were already at a “seasonal low point,” Winston wrote.

Sachs’s borrowing was asset-based, meaning the loans were backed by its inventory. Once the company had fewer goods on hand, Sachs was unable to borrow as much as it needed. With low liquidity, it was unable to pay vendors according to the terms they had agreed upon.

The $244 million in “catch-up payments” Saks required to pay vendors was quickly “cancelled,” Weinsten said, and once again the company was struggling to stock its shelves with the assortment its wealthy customers expected.

By the end of the second fiscal quarter on August 2, inventory was 9% below prior year levels, and inventory receipts were more than $550 million lower than previously expected. This reduced its liquidity further under the terms of the asset-based loan.

This created a problem for the key holiday season because Saks couldn’t do what a retailer always needs to do to stay competitive: “chase” inventory, so it had in-demand, on-trend items available during the busiest times of the year.

“You can’t really take on that much debt just through synergies,” Chadha said. “You have to grow the top line, grow your sales and increase profitability in order to maintain that much debt.”

Four months after Sachs obtained new financing, it was unable to pay interest to bondholders at the end of December. Two weeks later, it declared bankruptcy.

In Winston’s court filing, he made clear that it was Saks’s liquidity challenges, and its subsequent issues with vendors, that plunged it into bankruptcy — not larger issues related to the luxury goods market or the decline of department stores.

“[Saks] “Not a declining brick-and-mortar company,” Winston wrote. “There are strong indications that the debtors’ most lucrative customers continue to spend through their retail channels… In this regard, the constraints faced by the company are not driven by lower demand; where product is available, performance has remained strong.”

He said the company does not need to make significant investments in marketing or capital expenditures to improve sales trends. The synergies it expected to achieve through its merger with Neiman Marcus are also beginning to materialize more quickly.

By the end of the current fiscal year 2025, Saks expected to achieve run rate synergies of about $150 million, but it now expects that number to grow to $300 million. It experiences strong retention rates with its top customers and positive sales when inventory is available.

“This suggests that the challenges the company faces are related to inventory availability and vendor confidence,” Winston said. “It’s not the primary demand for luxury goods.”

Through its restructuring plan, which is subject to court approval, Saks secured $1.75 billion in new financing and pledged to make “future” payments to vendors, honor all client programs and continue paying employee salaries and benefits. Part of the money, $500 million, will be available to the company after it emerges from bankruptcy, which it said it expects to do later this year.

Whether it will be able to win back vendors and return the business to growth will fall to the company’s new CEO, former Neiman Marcus CEO Geoffroy van Raemdonck.

While company executives stress that conditions are strong for a recovery as long as the company replenishes its balance sheet, department stores are no longer what they used to be. Luxury brands have their own websites and stores and no longer rely on wholesalers like Saks and Neiman Marcus as they once did.

“They’re going to have to do something radical, right? They can’t survive on this funding, just as it is… because just applying isn’t going to change what Saks is really doing. It’s not going to get people to buy more stuff,” Chadha said. “You’re going to have to change the overall process, so it’s going to take some time. It’s an uphill battle. They’re not in the best place. It’s a department store, as it is.”