Fashion waited for 20 years or more for Saks Fifth Avenue and Neiman Marcus to come together.
And when the two were finally combined last year, with Saks Global absorbing its longtime competitor in a $2.7 billion deal, there was a tentative sigh of relief among the brands that sold their goods to Saks. The retailer had been delaying payments and the bills to suppliers were piling up. The deal with Neiman’s was set to put the luxe mainstay on a new financial footing.
In February, Saks Global promised to make good with brands through 12 monthly installment payments beginning in July. That wasn’t the quick payment brands were hoping for, but it was something.
The promise also came with something less welcomed — 90-day payment terms on new orders.
That’s a big increase from the 30-day terms at least some brands theoretically had with the company and enough to have the vendor community up in arms.
Waiting longer to pay bills, builds cash. And that cash can then be used to cover way past due payments to suppliers.
In a sense, the brands selling to Saks are helping to finance the payments they’re already owed.
And as hard as that is to understand outside an accountant’s office, the whole thing is also business as usual.
“The concept of extending payment terms is not unique to Saks,” said Greg Portell, a senior partner and global markets lead at consulting firm Kearney. “It’s not unique to retail companies. The delaying of payment terms pushes financing down the supply chain.
“It’s easier for a company to force those financing terms onto their vendors than it is for them to renegotiate with their lenders — to a point,” he said.
Portell said items like back payments are usually taken care of as part of a transaction that recapitalizes a company, but that wasn’t the case here.
While the deliberations behind the deal were private, sources said Saks planned for the transaction to help vendors get it back into the good graces of its vendors quickly. But the holiday season ended up being a tough one for Saks and the luxury world and the retailer adopted a move toward a conservative approach to cash.
But moving to longer payment terms is something that was always said to be in the cards with the new Saks Global set up.
In part, that’s because of where the retailer sits in the chain between shoppers and raw materials.
The end consumer pays right away and gets delivery immediately, but Saks is said to sell its goods in 120 days on average. That’s four months that the retailer has to keep inventory on the floor. And when things go wrong, it’s also the retailer that ultimately has to take the hit when goods sell below full price or not at all.
Costs accumulate quickly and Saks Global is trying to turn the page with new terms, which could in turn nudge vendors to try to extend terms with their own suppliers.
Slower payment terms are something that happens in that nebulous space between what’s written on a contract, the commercial realities of the market and the business relationships involved.
“There are ways to do it that are commercially acceptable,” Portell said. “And [there are] ways that are a little more dicey — unilateral changes are generally seen as that.”
While there are many brands that currently rely on Saks and/or Neiman Marcus and are anxiously waiting on their back payments and their next orders, Portell argued that vendors need to take a broader look at the market and allocate their product to their most important customers.
“It does force the brands to make choices and to take a little more ownership of their route to market,” he said. “There are many ways to find the consumer wallet. That requires a lot of business work and it requires a lot of thinking and game theory and a lot of thoughtful product provocations that generally don’t sit inside these retail houses, these retail fashion brands which are risk averse.
“It’s funny because most really strong fashion brands take risk,” Portell said. “They’re very daring with their designs, but they’re very conservative when it comes to route to market. It’s scary.”
Brands might just have to evolve as they move forward.
Saks Global is certainly doing as much.
“We are resetting the multibrand luxury distribution model, not because we feel like it. It’s because the model no longer works,” Marc Metrick, chief executive officer of Saks Global, said last month.
It’s a change happening under pressure.
Saks Global came out of the Neiman’s deal with a $1.8 billion asset-based lending facility and $2.2 billion in senior secured notes. Debt rating agency Standard & Poor’s gave the company a credit score of “CCC-plus.” The rating is stable, but well into junk territory.
Frederico Carvalho, a S&P debt analyst who covers Saks Global, said in an interview that he didn’t see any short term liquidity problems for the company.
But longer term, Saks Global has work to do.
“As of today, we think that their capital structure remains unsustainable and that’s based on credit metrics that are very pressured,” Carvalho said. “They don’t generate free operating cash flow. They’re burning cash.
“The acquisition will give them the potential for cost savings synergies, but we still highlight the risks if there’s any delay on the cost savings initiative,” Carvalho said.
While the company is working on cutting $500 million in its own costs, vendors are also a key part of the equation.
“In our research, our rationale was that with the acquisition, they will have enough liquidity to reestablish the relationship with their vendors,” Carvalho said. “But that’s a risk. That’s a big risk if the relationship continues to deteriorate, that can cause problems for the company going forward. They have a very high leverage, they have a free operating cashflow deficit.”
According to S&P, the company has a real estate business with assets of $3.5 billion.
“It’s a cushion,” Carvalho said. “They have assets, but they have to monetize to have access to extra liquidity.”
There’s no specific clock on Saks, but for reference, the next credit rating down in S&P’s scale, “CCC,” envisions that there could be a default within 12 months.
That gives Saks Global and its vendors some time still to reinvent their way into the future.
The Bottom Line is a business analysis column written by Evan Clark, deputy managing editor, who has covered the fashion industry since 2000. It appears every other Thursday.
