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DIP financing could give Saks time to monetize real estate

assets

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Vendor negotiations and inventory issues challenge Saks'

operations

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Legacy leases offer Saks bargaining power in

high-performing

malls, real estate adviser says

By Juveria Tabassum

Jan 14 (Reuters) - Saks Global's prime real estate

portfolio could serve as a crucial bargaining chip with lenders

as the hard-hit ​luxury shopping empire navigates its

restructuring after filing for bankruptcy.

The upmarket U.S. department store conglomerate filed for

Chapter ‌11 bankruptcy protection late on Tuesday, barely a year

after a debt-laden takeover intended to create a luxury

powerhouse by bringing Saks Fifth Avenue, Bergdorf Goodman and

Neiman Marcus under the same roof.

While Saks Global secured a $1.75 billion financing package

to help ⁠keep operations running through the bankruptcy process,

questions remain on whether the owner of some of the best-known

U.S. luxury chains can get back in the saddle.

Shutting down ⁠underperforming retail space could be a key

strategy to ensure the business survives, said Brandon Isner,

head of U.S. retail research at ‌New York-based real estate

advisory firm Newmark ( NMRK ).

"One of ‌the ways to monetize its portfolio would be through

the sale-leaseback option, where Saks could sell its assets to

an investor and lease them back to continue making money on the

asset, providing it with liquidity and allowing ​it to keep

things running at its stores," said Matt Weko, division

president of consumer goods and ‌services at real estate

investment adviser JLL.

Saks Global operates about 125 stores spanning about 13

million square feet (1.2 million square meters) in the U.S., and

owns or controls ground leases at 39 of them, according to its

court filing. Its retail empire consists of prime locations on

high streets such ​as Fifth Avenue in Manhattan and luxury

corridors in Beverly Hills, California, as well ​as top-tier

malls like Bal ‌Harbour Shops in Florida, where Saks and Neiman

Marcus banners anchor high-end tenant mixes.

Saks' flagship Fifth Avenue store is not included in the

bankruptcy, according to the filing. Global leases the site from

a separate entity, which has a $1.25 billion mortgage on it and

is not among the debtors.

'DARK STORES' FIRST ON ⁠THE CHOPPING BLOCK

The court filings give a hint of the conglomerate's

immediate next steps.

Saks Global asked the court for permission to shut down

about four stores that are ⁠no longer operating, commonly known

as "dark stores."

Selling such properties would command a discount of between

40% to 50% to their "lit value," which takes in to account the

fact that a store is open, according to a real estate adviser

familiar with the discussion around Saks' real estate, and who

has evaluated the portfolio.

To keep shelves stocked, the distressed luxury retailer is

expected to prioritize clearing payments to vendors to coax

brands to supply fresh merchandise after a year in which more

than 100 labels paused deliveries, bankruptcy experts note.

The financing package, still to be ⁠approved by the ‌court,

could buy time for Saks to retain the value of its real estate

assets and monetize them, rather than force ‌it to shut stores

quickly at discounts, often known as a fire-sale closure,

analysts and experts said.

THE TROUBLE OF TOO MANY

However, Saks and Neiman Marcus frequently co-anchor the

same luxury centers, creating ⁠internal competition. At the

Galleria Mall owned by Simon Property Group ( SPG ) in Houston,

for example, Neiman Marcus sits alongside Saks in a mall

boasting more than 400 stores and several luxury brands,

including Balenciaga, Louis Vuitton, Gucci and Bottega Veneta.

These co-locations would need to be reviewed and could be

among the first to be sold as Saks conducts a review of its

portfolio, analysts said. Saks, Neiman Marcus and Bergdorf

Goodman also face increasing competition from luxury brands like

Louis Vuitton or Chanel, which gravitate more and more

toward their directly owned stores.

"Why would a shopper choose Saks over a brand's flagship

boutique, where they receive VIP perks and immersive brand

experiences? Multi-brand retail only works when the environment

adds value, and Saks hasn't delivered that," said George Gottl,

chief creative officer, spatial design, at FutureBrand, which

advises multi-brand ​retailers on store design.

Department store rival and Bloomingdale's parent Macy's

is also closing about 150 underperforming stores,

including at some key locations such as the one on Fulton Street

in the New York City borough of Brooklyn, to help manage costs

and invest in stores giving better returns.

"Owners of A-quality centers would relish getting that space

back. Repurposing two-story anchors into split ​big boxes (such

as the Primark and Dick's House of Sport stores set to ‌open at

Newport Centre, New Jersey) or mixed-use can refresh the tenant

mix," added Isner, the retail analyst at Newmark ( NMRK ).