The Canada Pension Plan Investment Board has taken a major step into luxury retailing with the $6-billion (U.S.) joint purchase of high-end department store operator Neiman Marcus Inc., saying the retailer has attractive room for growth and has stood up well during downturns.
CPPIB and Ares Management LLC announced Monday they will team up to acquire a majority stake in Dallas-based Neiman Marcus, which operates 79 stores across the United States including two Bergdorf Goodman locations in New York. The chain's managers will retain a minority stake. Neiman has been owned by private equity firms TPG Inc. and Warburg Pincus since 2005, when they bought the company in a leveraged buyout for $5.1-billion.
The deal moves CPPIB into the luxury end of the retail market, which it says will complement its far different prior investments in discount retailers such as Dollar General, 99 Cents Only Stores and European clothing discounter Takko Fashion.
André Bourbonnais, who heads CPPIB's $10-billion private direct investment portfolio, said the fund is attracted to the "barbell" extremes of the retail sector, which have both demonstrated strength during recessions.
"There are various retailers in the middle and some of them have been very successful, but we think that middle space is actually quite crowded and very, very competitive, so that's why we like the ends of the retail space," he said.
Among luxury department-store chains, Neiman's carries the priciest of brands ranging from a $4,450 Brunello Cucinelli knit jacket to a pair of $1,845 Manolo Blahnik over-the-knee suede boots – helping make it among the industry's most productive players, as measured in sales per square foot.
Mr. Bourbonnais said Neiman Marcus is not eyeing a Canadian expansion, despite the CPPIB purchase.
While retail can be a cyclical sector that is hurt during times of economic downturn, Mr. Bourbonnais said Neiman Marcus held up "really well" through recent cycles, which was a key consideration in investing in the sector.
"Depending on the severity of the economic downturn, the luxury end of the market is sometimes less affected than the middle portion of the retail business," he said.
Neiman Marcus saw its total sales slump sharply to $3.6-billion in fiscal 2009 from $4.6-billion a year earlier as the financial crisis and recession hit the United States. But the retailer saw sales stabilize in 2010 and rebound to $4.35-billion in fiscal 2012, ended July 31.
CPPIB is not alone among retail owners to be wary about mid-priced retail players. Over the past decade or so, an array of mid-tier retailers have gone out of business, squeezed by discounters such as Wal-Mart Stores Inc. at the lower end and upscale chains such as yoga-wear specialist Lululemon Athletica Inc. and jewellery specialist Tiffany & Co. at the top end.
In Canada, mid-priced purveyors such as Sears Canada Inc. continue to feel the pinch of cautious consumer spending. And while a wide swath of retailers were hurt by the recession, high-end chains generally recovered more quickly than mid-level retailers. At the same time, dollar stores and other discounters quickly gained traction as consumers sought out bargains.
Luxury retail companies are an increasing target for Canadian pension funds as part of their long-term strategy to buy stakes in a wide array of industries as they search for investments that will yield stronger returns than stock markets and with less volatility.
The Ontario Teachers' Pension Plan agreed to invest $500-million (U.S.) in Hudson's Bay Co. in late July to help finance the Bay's purchase of Saks Inc. Teachers has also invested in Michael Kors Holdings, a luxury fashion label.
CPPIB has expanded globally into a wide range of sectors including health care, energy, technology and manufacturing. The fund lists investments in 40 major private companies including U.S. private hospital company LHP Hospital Group Inc., semiconductor manufacturer Freescale Semiconductor Inc. and U.K. engineering and manufacturing company Tomkins PLC.