Is Hudson’s Bay Going To Buy Neiman Marcus?

Without a doubt, 2017 has been a difficult year for department store brands. Macy’s, Sears, and J.C. Penney have all reported ongoing struggles with shrinking foot traffic, declining same-store sales and falling margins for the last several consecutive quarters – and though many promises have been made, no turn around is readily apparent for most of the players in the struggling segment.

In the rather fraught world of department store commerce, cure-alls are not readily available these days.

But interesting ideas abound – and, this week, one of the more eye-catching ideas has appeared almost out of nowhere.

Two of the largest retail players in the luxury department store space – Neiman Marcus and Hudson’s Bay – may soon be joining their fortunes.  Hudson’s Bay is the Canadian parent of both Lord & Taylor and Saks 5th Avenue.

Neiman Marcus has struggled in recent years as shopping habits and preferences among consumers has shifted – and the Texas-based luxury retailer has found it difficult to navigate the shift.  Consumers, especially the younger ones, have been trained to prefer digital experiences for their immediacy and simplicity to their in-store counterparts. Years of discounting as a standard response to try to drive customers back to stores  has left have also left large swaths of the buying population unwilling to pay full price – even for high-end and luxury goods.

This has left Neiman Marcus in a bit of a bind – and the fate of the 42 stores it operates in the United States a bit uncertain.

The situation is not something the high-end retailer has failed to notice – and, in fairness, Neiman Marcus has worked hard, particularly in the last few years, to upgrade for the digital edge.

Two weeks ago we spoke with the head of Neiman Marcus’ Innovation Lab Scott Emmons about the their hew hi-tech flagship in Dallas-Fort Worth – and how the chain plans to broaden its base.

“If we only focus on the core, then we never bring any new customers into that circle. Across markets we are always thinking about delivering the best experience to our best customer always. But how do we make that circle bigger and deliver that across the board to people who have taken the time to walk in the door so that we are creating that relationship that ends up creating a new, repeat customer?” Emmons told PYMNTS’ Karen Webster about the brand’s efforts to hit reset on their in-store retail experience while maintaining the high level of customer service for which they are famous.

But, on Tuesday, it came out in a financial disclosure that also among the “strategic options” the brand is considering is a sale, to deal with around $5 billion in debt and slumping sales.

So: what will the potential tie-up mean for both brands – what’s it in for Hudson’s Bay – and, will it work?

So Are The Talks Real

It is worth noting that so far there is no official confirmation of this rumor from either of the main players.  Hudson’s Bay has specifically said in this case that it does not discuss market rumors.

But it also winked a bit at the notion it might do some acquiring.

“Generally speaking, as we have previously stated, we selectively evaluate opportunities to accelerate the company’s strategic growth while maintaining or enhancing its credit profile.”

Hudson’s Bay had also, in recent memory, been discussed as a potential suitor to Macy’s – though the unnamed sources in this case seem to think the talks with Neiman Marcus are further along.

Financial details about a merger have not been leaked – though “a person with knowledge” of the talks said any deal would be contingent on Hudson’s Bay assuming Neiman Marcus’s significant debt load.

If the deal were to go through, it would mark the third-time Neiman Marcus has changed hands since 2005 (it has been owned by private equity firms for the last 12 years).

Neiman Marcus abandoned its plans to go public in January, a month before the ratings agency Standard & Poor’s downgraded it to a CCC+.

The Hudson’s Bay companies have done a bit better in the shift to digital retail: Richard A. Baker, the chief executive of Hudson’s Bay, has long made digital innovation an important and central part of the business, and has put about $1 billion into store renovations.

Hudson’s Bay also has the advantage of primarily operating in Canada – where the department store market is much, much less active.

“The Canadian market is way less competitive,” David Soberman, a professor of marketing at the University of Toronto’s Rotman School of Management told The New York Times, “Here there’s basically just the Bay; in their niche, there’s not really anybody else.”

The competition in Canada, Soberman notes, is largely from big box and wholesale chains like Costco and Walmart – and the high end is dominated by or Holt Renfrew, a Canadian luxury goods retailer with prices that start where Hudson’s Bay generally tops out. The middle of the market, on the other hand, is pretty much owned by Hudson’s Bay.

“If you want certain things and you don’t want the very best, the Bay is probably a good choice, the only choice,” Professor Soberman said, adding that Nordstrom’s gradual move into Canada might have eroded that prized position, at least among the more affluent Hudson’s Bay shoppers.

Will It Work

So far, enthusiasm for the deal has not been overwhelming.  Hudson’s Bay’s stock price fell slightly on the speculation, and some think that the merger here won’t change the essentially troubling picture enough.

“I look at this just as moving the deck chairs around on the proverbial Titanic,” Mark A. Cohen, the director of retail studies at Columbia Business School, told the New York Times in a conversation about a potential merger between Hudson’s Bay and Neiman Marcus.

But given the falling figures – clearly, something has to happen.  And perhaps, when it comes to upper-middle class department store chains, Neiman Marcus and Hudson’s Bay can take on better together.