Luxury retailer Saks leans on real-estate rights to keep doors open during bankruptcy
DIP financing could give Saks time to monetise real estate assets
Vendor negotiations and inventory issues strain Saks’ operations
Real estate consultant says legacy leases give Saks bargaining power in high-performing malls
Jan 14 (Reuters) – Saks Global’s prime real estate portfolio could serve as a key bargaining chip for lenders as the hard-hit luxury shopping empire enters a restructuring process after filing for bankruptcy. The luxury U.S. department store group filed for Chapter 11 bankruptcy protection late Tuesday, barely a year after a debt-laden takeover aimed at creating a luxury powerhouse by bringing Saks Fifth Avenue, Bergdorf Goodman and Neiman Marcus under the same roof. While Saks Global has secured a $1.75 billion financing package to help keep operations going through bankruptcy, questions remain about whether the owner of some of the best-known U.S. luxury chains will be back in business.
Closing underperforming retail spaces can be an important strategy to ensure business survival, said Brandon Isner, head of U.S. retail research at Ohio-based real estate consulting firm Newmark.
“One of the ways it can monetize its portfolio would be through a sale-leaseback option, where Saks could sell its assets to an investor and lease them back to continue monetizing the asset, providing it with liquidity and allowing business to continue at its stores,” said Matt Weko, head of consumer goods and services at real estate investment advisor JLL Capital Markets.
Saks Global operates about 125 stores spanning about 13 million square feet (1.2 million square feet) in the U.S. and owns or controls space leases at 39 of them, according to court filings. The retail empire consists of prime locations on major streets such as Fifth Avenue in Manhattan and luxury corridors in Beverly Hills, California, as well as high-end shopping centers such as Bal Harbor Shops in Florida, where Saks and Neiman Marcus banners represent high-end tenant mixes.
Saks’ flagship Fifth Avenue store is not in bankruptcy, according to the filing. Global is leasing the site from a separate entity that has a $1.25 billion mortgage on it and is not among the debtors.
FIRST ‘DARK STORES’ ON THE CHOP BLOCK
Court records provide clues as to the conglomerate’s next steps.
Saks Global has asked the court for permission to close four stores that are no longer operating, known as “dark stores.”
The sale of such properties would require a discount of 40% to 50% based on their “lit value,” according to a real estate consultant familiar with discussions of Saks properties and who has evaluated the portfolio; this also takes into account the fact that a store is open. After a year in which more than 100 labels paused deliveries, the struggling luxury retailer is expected to prioritize clearing payments to vendors to persuade brands to supply fresh produce to keep shelves stocked, bankruptcy experts said.
Analysts and experts said the financing package, which still must be approved by the court, could buy Saks time to preserve the value of its real estate assets and make money from them, rather than forcing it to quickly close stores with discounts commonly known as fire sale closures.
But Saks and Neiman Marcus often bring the same luxury centers together, creating internal competition. For example, at the Simon Property Group-owned Galleria Mall in Houston, Neiman Marcus sits next to Saks in a mall with more than 400 stores and many luxury brands such as Balenciaga, Louis Vuitton, Gucci and Bottega Veneta.
Analysts said these co-locations need to be reviewed and could be among the first to be sold as Saks examines its portfolio. Saks, Neiman Marcus and Bergdorf Goodman also face increasing competition from luxury brands such as Louis Vuitton or Chanel, which are moving directly into their own stores.
“Why would a customer choose Saks over a brand’s flagship boutique where they get VIP benefits and immersive brand experiences? Multi-brand retail only works when the environment adds value, and Saks failed to deliver that,” said George Gottl, chief creative officer at FutureBrand, which advises multi-brand retailers on store design.
Department store rival and Bloomingdale’s parent company Macy’s is closing about 150 underperforming stores, including some key locations like Fulton Street in the New York City borough of Brooklyn, to help manage costs and invest in stores that generate better returns.
“Owners of A-list centers would be happy to reclaim this space. Relocating two-story anchors into subdivided big boxes (like the upcoming Primark and Dick’s House of Sport stores in Newport Center, New Jersey) or renewing the mixed-use tenant mix,” added Isner, the Newmark retail analyst.
(Reporting by Juveria Tabassum in Bengaluru, Editing by Lisa Jucca and Matthew Lewis)
