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Neiman Marcus Group Technology IPO in Luxury Goods Market

Founded over 100 years ago, there is one of the largest omni-channel luxury fashion retailers in the world, with approximately $4.8 billion in revenues for fiscal year 2014, of which approximately 24% were transacted online. The company produces a distinctive selection of women's and men's apparel, handbags, shoes, cosmetics and precious and designer jewelry from premier luxury and fashion designers.

In 2010 Karen W. Katz (CEO of Neiman) embarked on the road of technology for transform and grows the company. It is really unique for the luxury brand company choose e-commerce and omni-channel platform. And the pictures below depict the reason for it. According to the Deloitte reports of “Global Powers of Luxury Goods 2015”, about the half of respondents do not care about to go to the store of luxury goods, and prefer to browse it online. It is logically to say that if 50% of people who interested in luxury brands browsing it, the part of this people also would like to buy it online and not spend their time on shopping.

Investing in technology help Neiman’s to be the one of the best in CRM system. Being in touch with the potential clients is really important for company in luxury goods market. By using smart analytics, Neiman Group collects information on its customers’ shopping habits and tailors their in-store and online experience.

InCircle – some innovation on the company which was invented last year. The main idea is designed to cultivate long-term relationships with the customers and enhance the quality of service Neiman provide to them. Approximately 40% of the total revenues in fiscal year 2014 were generated by the InCircle loyalty program members who achieved reward status.

Currently Neiman is implimenting a new Oracle-based merchandaising system, the name of it – NMG One, it will hrlp the company to purchase, manage and sell the enventory across the chanell more efficiency. It will be completed in 2016 and should increase the margin and cash flows benefits in the future.

Industry: The most “positive” aspects.

The whole market of Luxury Goods represents stable growth during last 5 years. The main part of consumers placed in USA and other developed markets. However, nowadays demand on the luxury commodities is increasing in many developing international markets especially in Asia and Middle East.

The reason for the growing interest on luxury goods from developing market is that demand on these commodities has high elasticity. Higher income = higher spending on this type of goods.

According to the bar chart below (year of 2014) the most conspicuous country is Hong-Kong. The growth of luxury goods in 2014 was 33.4% comparing with 2013. Nobody denies the fact that it was a really high opportunity for many companies in this sector to transfer some of their business to Hong-Kong and other Asians country which also represented the higher growth. The highest net profit is generated in Switzerland which was about 20.7%. Moreover, all of this information is worth our attention. This market is profitable, low risky, and filled with potential consumers.

Modern technology has found its way to luxury products. In fact online sales of the luxury goods market depicts about 4% of the U.S. luxury goods market in 2014, which has increased by 40% from 2009.According to this statement investing in technology for the firms in the market of luxury goods is justifying. Currently we can find that companies are competing not only in producing better luxury commodities, but also in implementation of technologies, which are aimed at attracting and retaining the consumers.

But now pay attention to the following graphics.

As I wrote before, the market of luxury goods has a high elasticity of cost. Hong-Kong was harmed from financial market this year a lot. The GDP growth rate at the beginning of 2015 fell to 0.2%, and currently very unstable. After this fall it was some news highlight that informed about reduction of luxury goods stores in Hong-Kong and the most of all affected clothing market. Obviously this slowdown was not only in Hong-Kong, but also happened in whole Chinese market. So, the most promising market reduces the speed. There are huge list of the companies which was harmed by this slowdown: Burberry(reducing in sales in the whole China), Remy Cointreau (sales declined by 9% last month), Prada (dropping in profits by 28% in the China), and export of Swiss watches to China have also collapsed and that’s not at all.

Furthermore there is really interesting graph below, from which we can find the slowdown of the luxury goods market growth. It could be easily find that the slope of the trend from 2012 to 2014 become flatter. According to the current economic situation it is really hard to say that the markets will grow at the nearest future.

Risk factors.

As I said before, the market of luxury goods is not very risky. There are not so many risk factors and the average growth rate is about 3% with low volatility.

Now let's come back to our company. What are the potential risks for the company?

• General economic and industry conditions, including inflation, deflation, changes related to interest rates, rates of economic growth, current and expected unemployment.

• Strong competitors could drain the company (competitive pricing strategies; entry by new competitors into markets and channels in which Neiman Groups currently operate; expansion of product or service offerings by existing competitors and so on).

• Changes in prices for commodities and current tax rates and polices.

This risk is impossible to evaluate, which raise a huge problem for evaluating IPO price. But of course we should mention these factors in our Valuating.

However, the good price at the IPO is not enough. If the world economic situation will be the same, there are no any downward opportunities for the Neiman future stock. Despite on the fact, that Neiman Group is high technologies Company according to the many competitors, also it has the excellent financial statements, but the Neiman Group could fall because of instability of economics(or different political risks how it was in China), when people will save more and consume less. There are not so many risk factors but all of them are really dangerous for Neiman.

Financial Performance.

So now let' proceed to the main part of the letter.

According to the Balance sheet the amount of assets increasing during the 4 years from 5.201 bln$ in 2012 to 8.871 bln $ in 2015. However the amount of total assets in 2014 have been equals to just 100 mln $ , which is less than in the 2015. So, there is high jump between 2013 and 2014 years and slowdown after this period. The same situation happened with liabilities. Book value currently equals to approximately 1.500 bln $, which is really high value for this market.

Neiman Tot Assets         TotLiabilities         Book Value
2015 8 871 400 000         7 416 700 000          1 454 700 000
2014 8 761 700 000         7 329 100 000          1 432 600 000
2013 5 300 200 000         4 469 200 000           831 000 000
2012 5 201 900 000         4 586 300 000           615 600 000

The main distinguished feature of the Neiman is the very high Enterprise Value for the market of the luxury goods. For example, Hugo Boss EV equals to 8 bln dollars.

Between 2014 – 2015 year:

Market median EBITDA/Revenue = 22.8%

Market median Sales growth = 7.6%

Neiman Growthofsales EBITDA/Revenue
2015 -19% 13.82%
2014 5% 7.21%
2013 4% 13.67%
2012 13.43%

There are not really good performance… The amount of sales dropped in 2015, it touched many companies, but some of these companies have managed this problem, but not Naiman. The company lost 19% of sales in 2015, despite their technology and costumer focus.

However, the profit sharply increased by 135% from 2014, it could mean that in the current year Neiman reduced costs.Costs likely to increase in the 2016 – 2017 years and the profit could become very low, probably negative.

Neiman      Growthofprofit    Growthofsales
2015      135%       -19%
2014       18%         5%
2013      -217%          4%
2012

Now look at the market data of 2 performance: EV/Sales and EV/EBITDA and let's compare it with our company.

Neiman EV      EBITDA        EV/EBITDA       EV/Selling
2015 8871445000     543000000      16.3378361       9.915552699
2014 8761700000     348900000      25.11235311       7.9550572
2013 5300200000     635300000       8.342830159       5.058408093
2012 5201900000     583800000       8.910414526       5.166252855

The low performance in EV/EBITDA means that our company generate the low EBITDA comparing with it Enterprise Value. The average EV/EBITDA on the market is lower in 1,5 times.

Unfortunately there is no information about price and amount of issuing shares. So, when we tried to build a regression to predict the offer value, there are many coefficients which were rejected.

So there are not many ways to value the company share price, but when we do not know the information about shares offered or total amount of shares, it is impossible to predict the price of stock using simple math. We should compare the Company with other market…. What we have already done. Using these methods we estimated average IPO price, which will be approximately 2 billion dollars. Neiman should rise about 100 million dollars in this IPO. This our forecast based on the methods, which were described above.

Conclusion.

Intuitively, comparing with all of this statistics, the average stock price of the Neiman will be lower than average price of the stocks on the market. The Neiman Group a really high company, with a huge capitalization and modern technologies, which most of the other luxury goods companies do not have. However, when we analyzed the financial statement we have found that there are pile of companies with lower enterprise value, but higher EBITDA and amount of sales. There is a much more important for Retail Company to increase number of sales, but not the number of technologies…. Probably, Neiman Group has chosen bad strategy, when they invested in technology, but not in the other expenditures.

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