Two months ago, Barneys New York filed for bankruptcy, brought down by a combination of slowing sales and a sharp increase in the rent for two of its flagship stores. Since then, management has been scrambling to avoid liquidation.
Unfortunately, the potential buyers most likely to keep Barneys open for business -- a group led by entrepreneur Sam Ben-Avraham -- have been unable to secure financing for a bid thus far. Instead, the luxury department store's best hope of survival may be to become a department in another store: longtime rival Saks Fifth Avenue. That's what lead bidder Authentic Brands Group and Saks owner Hudson's Bay (OTC:HBAYF) are proposing for the retail icon.
Hudson's Bay enters the fray -- indirectly
A few years ago, multinational department store conglomerate Hudson's Bay might have been eager to buy Barneys New York out of bankruptcy. However, new CEO Helena Foulkes has moved aggressively over the past year and a half to unwind most of the company's global expansion. The goal is to simplify the company and focus on its two biggest and most successful chains: Saks Fifth Avenue and Hudson's Bay. As a result, Hudson's Bay has no interest in buying Barneys outright.
However, brand management company Authentic Brands Group has struck a deal to license the Barneys New York brand to Saks Fifth Avenue, assuming it wins the bankruptcy auction that is playing out this month. If the bid is successful, Saks would likely open Barneys-branded boutiques in some or all of its stores. It would also have the option to use the Barneys New York brand for private-label merchandise.
Authentic Brands is set to be the "stalking horse" bidder in the auction, after lenders approved its $264 million bid for Barneys this week. That means other potential suitors -- including Ben-Avraham's group -- would have to top that number to prevail at the bankruptcy auction.
Keeping stores open wouldn't make much sense
After its bankruptcy filing in August, Barneys New York began closing most of its stores. The company aimed to keep just seven of its existing locations operating: both of its full-line stores in Manhattan, full-line outposts in Beverly Hills, San Francisco, and Boston; and two Barneys Warehouse outlet stores in New York and California. Barneys also maintained its plans to open new stores at the American Dream Meadowlands megamall outside of New York City and at the Bal Harbour Shops luxury mall near Miami.
Authentic Brands Group has held open the possibility of keeping some stores open, provided it can win big rent concessions from the retailer's landlords. However, in light of its plans to license the Barneys brand to Saks Fifth Avenue -- and the tough retail environment more broadly -- it wouldn't make much sense to maintain a separate fleet of Barneys New York stores.
Indeed, the geographic overlap between Saks Fifth Avenue and Barneys New York's remaining store fleet is remarkable. Both luxury retailers have two outposts in Manhattan, and their flagship stores are barely more than half a mile apart in Midtown. Additionally, Saks and Barneys have their San Francisco stores three blocks apart in the busy Union Square shopping district. In Beverly Hills and Boston, the two chains have stores across the street from one another. Finally, Saks already has a store at the Bal Harbour Shops and will soon open a location at American Dream Meadowlands.
In short, keeping some Barneys full-line stores open wouldn't give the brand broader reach than it would get as a department inside Saks. While it could offer a greater depth of assortment in its own stores, that's not a compelling reason to keep the chain open given the pressure that all department stores face today.
A savvy move by Hudson's Bay
If Authentic Brands wins the bankruptcy auction, its deal with Hudson's Bay will help the latter shore up Saks' positioning in the luxury retail market. Licensing the Barneys New York brand would enable it to take bigger risks on up-and-coming designers in a dedicated space within its stores.
Saks Fifth Avenue could certainly use a leg up. The chain's sales growth has slowed this year after a phenomenal 2018. Moreover, its flagship store faces new competition from New York City's first Neiman Marcus store -- which opened earlier this year -- and the opening of Nordstrom's long-planned Manhattan flagship store next week.
Adding Barneys New York boutiques in its stores could help offset these headwinds by enabling Saks to gain market share among Barneys aficionados. Thus, the Barneys bankruptcy has presented a great opportunity for Hudson's Bay to solidify Saks Fifth Avenue's leadership position in the U.S. luxury retail market.