Barney’s In Credit Penalty Box?

Credit is drying up for Barney’s. It’s on the block, but price expectations need to come down to Earth. Indirect impact on vendors is a greater consideration than a near-term hit.

Rumors are swirling in the industry that the Factors (intermediaries facilitating frictional credit between retailers and suppliers) have put Barney’s in the penalty box and stopped approving Spring orders. Unfortunately for Barney’s, this is usually a self-fulfilling prophecy in that once ‘payment issues’ are the topic du jour, it usually ends up impacting product flow and business to a greater degree.

I’m not sure if the issue here is solvency. In fact, since Istithmar (Dubai’s government-funded investment arm) bought Barney’s from JNY in 2007, it has underperformed, but remains profitable. The issue is that there is no CEO, and Istithmar is trying to sell Barney’s for a price in the vicinity of the $942mm it paid JNY in July 2007.

Guess what Istithmar… the 14x EBITDA you paid in mid-2007 before the credit crisis is a lot different from where such an asset would be priced today. You should know this -- $75 oil helped fund your mid-’07 purchase when you outbid Japan’s Fast Retailing. Not as much to bank on after a 45% slide in oil, a 2-3 point slide in margins, and weaker sales on the margin. I’d need to assume a high teens multiple no for anything close to $1bn. Sorry… no can do.

Fortunately, no vendors are overly exposed to Barney’s. Most of the companies dependent on Barney's listed in public documents (per Cap IQ) are systems and software-related. But Barney’s is an important ‘showcase’ account. For example, Timberland had a big win when it got a pair of its lux boots sold in Barney’s last year. This creates a halo effect for the brand. Saks is not exactly knocking the cover off the ball either. I don’t like seeing fewer showcase locations. If Barney’s situation gets worse, this will definitely nudge some companies into evaluating how they approach brand positioning.

An important consideration is if that Barney’s credit issues are solely because of uncertainty around its future ownership – but as a stand-alone retailer it remains a viable entity (quite possible), then this could be an opportunity for those retailers with solid balance sheets (i.e. RL) to pick up a few points of share by working with Barney’s during this period.