I mourn the passing of any successful retail company into the netherworld of nonpublic status. For one thing it gives us chroniclers of the retail world less to observe and critique. But the announcement in early May of the buyout of Neiman Marcus Group
Sure, we can still look at sales results from companies like Saks
For anyone who missed the news, Neiman Marcus agreed a month ago to be bought out by two private equity firms, Texas Pacific Group and Warburg Pincus. This followed a strategic review led by Goldman Sachs and a subsequent auction of the company. The consensus on the street is that the price tag of $5.1 billion is "full, but fair." Let's face it: Neiman's has always traveled in style.
So, does this passing of a retail giant contain some value? I thought it might be worthwhile to look at the two big industry deals in process now, with the other being Federated
I like to look at acquisition prices as a multiple of prior year EBITDA, a rough proxy for a firm's operating cash flow. You have to be careful to adjust for debt and cash, not just share price, to get the true multiple from the deal. Using that definition of a firm's enterprise value -- market cap, plus debt, minus cash -- the Neiman Marcus and May deals look like this:
|Prior Year EBITDA||435||1837|
|Prior year Sales Growth||14.4%||8.2%|
It's not surprising that Neiman sold for an EBITDA multiple of 11, while May fetched only 9.3, with the difference caused by Neiman's stronger operating potential and higher sales growth.
From these deal prices we should be able to learn something about the current stock valuations of the other high-end retail players. Whenever someone is prepared to lay down serious cash on the barrel head, it's an indication of careful consideration of value, although I must admit that acquisitions have been known to be priced too high in the past. Let's say these are fair, but top-end prices. I applied the same methodology to Saks, Nordstrom, and Coach, using enterprise value as the numerator instead of a deal price.
|Prior Year EBITDA||441||469||989|
|Prior year Sales Growth||2.4%||38.6%||10.6%|
The Saks numbers are a year old, since the company has delayed filing its current annual report. Through three quarters of 2004, Saks was tracking 16% lower EBITDA than the prior year, so its current multiple is probably closer to 9.
Based on the above, I would probably be careful with Saks these days, since the company, on an enterprise value basis, sports an EBITDA value multiple of 9 -- at least until the company gets its sales problem fixed. Coach, at 25.1, is more than twice the Neiman Marcus multiple. I can understand a premium for its torrid growth rate, but an investor would need to be very confident of the company's growth prospects to view this as an attractive buy-in price, despite the fact that the analysts love the stock. Nordstrom at 9.5 looks like it might have a little room to run.
Of course, this comparison is dependent upon the two deals being fairly priced, always an uncertainty. But I find it worthwhile to compare market valuations with done deals as a sanity check on current market prices.
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Fool contributor Timothy M. Otte admires retailers with style. He welcomes comments on his articles, but doesn't own stock in any company mentioned in this article.