Professor Elam

Accounting & Investing Info for San Antonio A & M

recent posts

about

Neiman’s Posts a Loss

Chevy Norwood suggested in her post about N-M that she hoped some of the sales would go to charity.  No Chevy, N-M is NOT a charitable 501c3 organization!  As a matter of fact, click N-M posts loss  and learn that they just lost $42 M!  But sales are up 9% over a year ago!  Egads, how did that happen!  No doubt all of you just assumed that with their high priced goods N-M always makes money.  As you will see when you read the article, they were acquired by Texas Pacific and Warbury Pincus. The buyers used junk bonds to finance the purchase.  This is called a leveraged buyout.  Leverage is the use of debt to finance a purchase.  But one is betting that sales will be high enough to offset the higher interest expense.  Guess what, they weren’t.  What is a junk bond ? Why is it called junk?  Why would someone want something referred to as junk?

James B.  Stewart wrote a great book entitled Den of Theives .  Non fiction but it reads like a fiction thriller.  It is the story of how Mike Miliken created a junk bond phenomenon at Drexel Burnahm that allowed the take over frenzy of the 1980s featuring Boone Pickens and Ivan Boesky.  I highly recommend it for a book report or background in understanding finance.  The character of Gordon Gecko in the movie Wall Street was based on Boesky.

Posted in

2 responses to “Neiman’s Posts a Loss”

  1. Chevy Norwood Avatar
    Chevy Norwood

    I actually do not find it surprising that NM is experiencing financial problems. With rising fuel costs and a shrinking upper middle class, NM doesn’t have a steady consumer base. Also, there is major competition
    in the marketplace for higher-end retailers. Couldn’t NM benefit from the interest expense come tax time? Couldn’t NM “write” the interest expense off on their taxes? Although, their cash has drastically decreased from the year before, NM is still a liquid company. At least they have some cash on hand to pay short debt and obligations and all their cash isn’t tied up in fixed assets. NM has done a good job marketing and advertising its products since there was a third quarter gain. But, I must admit that I didn’t realize that NM debt was financed with junk bonds. A junk bond is a low quality bond and it offers a high rate of return because the risk is astronomical! With all the outrageous merchandise and prices on the Christmas Wish List, NM should have an increase in operating income come first quarter 2007!

    Like

    Reply
  2. Dennis Elam Avatar
    Dennis Elam

    How do you figure there is a shrinking upper middle class? The stock market is setting new records on the Dow Industrials and tax receipts are up in Washinton DC, that sounds like an expanding middle class to me, I had lunch at a Highland Park restaurant a few weeks back and things sure looked good there to me! Rest assured that N M wrote the interest expense off but that does not offset losing money. Now we can’t see their statements since the buying group took them private. Junk bonds really took off for just this reason, they have been used to finance take overs, I will try to get Barbarians at the Gates shown at school if we can find a time when a few of you can come, it is all about the take over of RJR Tobacco by Kohlberg Kravis Roberts using junk bonds. Or read Den of Theives!
    DLE

    Like

    Reply

Leave a comment