10-Q 1 q2fy19201912610q.htm 10-Q Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549 
FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended January 26, 2019
 
OR
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to            
 
Commission file no. 333-133184-12
 
Neiman Marcus Group LTD LLC
(Exact name of registrant as specified in its charter) 
Delaware
20-3509435
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1618 Main Street
Dallas, Texas
75201
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (214) 743-7600
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes o  No ý
(Note: The registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. Although not subject to these filing requirements, the registrant has filed all reports that would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months had the registrant been subject to such requirements.)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer ý
Smaller reporting company o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o  No ý
 
 
 
 
 


NEIMAN MARCUS GROUP LTD LLC
 
INDEX
 
 
 
 
Page
Part I.
Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II.
Other Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
(in thousands, except units)
 
January 26,
2019
 
July 28,
2018
 
January 27,
2018
 
 
 
 
 
 
 
ASSETS
 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

Cash and cash equivalents
 
$
41,338

 
$
38,510

 
$
35,788

Credit card receivables
 
36,462

 
33,689

 
42,258

Merchandise inventories
 
999,337

 
1,115,839

 
1,137,178

Other current assets
 
247,996

 
123,822

 
143,452

Total current assets
 
1,325,133

 
1,311,860

 
1,358,676

 
 
 
 
 
 
 
Property and equipment, net
 
1,539,277

 
1,569,904

 
1,557,112

Intangible assets, net
 
2,615,798

 
2,735,303

 
2,786,041

Goodwill
 
1,753,245

 
1,883,869

 
1,887,729

Other long-term assets
 
32,856

 
44,967

 
37,377

Total assets
 
$
7,266,309

 
$
7,545,903

 
$
7,626,935

 
 
 
 
 
 
 
LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

Accounts payable
 
$
252,945

 
$
318,969

 
$
283,805

Accrued liabilities
 
527,872

 
511,289

 
532,081

Current portion of long-term debt
 
29,426

 
29,426

 
29,426

Total current liabilities
 
810,243

 
859,684

 
845,312

 
 
 
 
 
 
 
Long-term liabilities:
 
 

 
 

 
 

Long-term debt, net of debt issuance costs
 
4,732,782

 
4,623,152

 
4,572,262

Deferred income taxes
 
688,764

 
707,554

 
762,840

Other long-term liabilities
 
621,615

 
596,332

 
607,507

Total long-term liabilities
 
6,043,161

 
5,927,038

 
5,942,609

 
 
 
 
 
 
 
Membership unit (1 unit issued and outstanding at January 26, 2019, July 28, 2018 and January 27, 2018)
 
—

 
—

 
—

Member capital
 
1,325,116

 
1,587,350

 
1,588,081

Accumulated other comprehensive loss
 
(44,607
)
 
(22,297
)
 
(38,379
)
Accumulated deficit
 
(867,604
)
 
(805,872
)
 
(710,688
)
Total member equity
 
412,905

 
759,181

 
839,014

Total liabilities and member equity
 
$
7,266,309

 
$
7,545,903

 
$
7,626,935

 
See Notes to Condensed Consolidated Financial Statements.


1

NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,380,323

 
$
1,480,046

 
$
2,473,107

 
$
2,575,728

Other revenues, net
 
13,797

 
14,065

 
25,404

 
25,929

Total revenues
 
1,394,120

 
1,494,111

 
2,498,511

 
2,601,657

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
958,547

 
1,021,984

 
1,658,783

 
1,720,254

Selling, general and administrative expenses (excluding depreciation)
 
309,223

 
321,897

 
585,984

 
616,714

Depreciation expense
 
47,809

 
53,428

 
98,503

 
108,656

Amortization of intangible assets
 
10,536

 
11,500

 
21,878

 
23,664

Amortization of favorable lease commitments
 
12,620

 
12,784

 
25,062

 
25,569

Other expenses
 
11,895

 
12,614

 
21,324

 
15,454

 
 
 
 
 
 
 
 
 
Operating earnings
 
43,490

 
59,904

 
86,977

 
91,346

 
 
 
 
 
 
 
 
 
Benefit plan expense, net
 
872

 
462

 
1,745

 
925

Interest expense, net
 
81,434

 
76,549

 
161,983

 
152,647

 
 
 
 
 
 
 
 
 
Loss before income taxes
 
(38,816
)
 
(17,107
)
 
(76,751
)
 
(62,226
)
 
 
 
 
 
 
 
 
 
Income tax benefit
 
(9,810
)
 
(389,639
)
 
(19,574
)
 
(408,541
)
 
 
 
 
 
 
 
 
 
Net earnings (loss)
 
$
(29,006
)
 
$
372,532

 
$
(57,177
)
 
$
346,315



See Notes to Condensed Consolidated Financial Statements.




2

NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
(UNAUDITED)
 
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Net earnings (loss)
 
$
(29,006
)
 
$
372,532

 
$
(57,177
)
 
$
346,315

 
 
 
 
 
 
 
 
 
Other comprehensive earnings (loss):
 
 

 
 

 
 

 
 
Foreign currency translation adjustments, before tax
 
—

 
4,549

 
(1,835
)
 
13,156

Change in unrealized gain (loss) on financial instruments, before tax
 
(6,848
)
 
13,761

 
(6,070
)
 
18,910

Reclassification of realized loss (gain) on financial instruments to earnings (loss), before tax
 
(2,633
)
 
1,033

 
(4,555
)
 
2,272

Change in unrealized gain (loss) on unfunded benefit obligations, before tax
 
(358
)
 
(10
)
 
(18,889
)
 
582

Tax effect related to items of other comprehensive earnings (loss)
 
2,549

 
(4,678
)
 
7,978

 
(9,868
)
Total other comprehensive earnings (loss)
 
(7,290
)
 
14,655

 
(23,371
)
 
25,052

 
 
 
 
 
 
 
 
 
Total comprehensive earnings (loss)
 
$
(36,296
)
 
$
387,187

 
$
(80,548
)
 
$
371,367

 
See Notes to Condensed Consolidated Financial Statements.


3

NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Twenty-six weeks ended
(in thousands)
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
CASH FLOWS - OPERATING ACTIVITIES
 
 

 
 

Net earnings (loss)
 
$
(57,177
)
 
$
346,315

Adjustments to reconcile net earnings (loss) to net cash provided by (used for) operating activities:
 
 

 
 

Depreciation and amortization expense
 
157,685

 
170,127

Deferred income taxes
 
(1,771
)
 
(402,981
)
Payment-in-kind interest
 
—

 
29,289

Other
 
2,421

 
(806
)
 
 
101,158

 
141,944

Changes in operating assets and liabilities:
 
 

 
 

Merchandise inventories
 
(22,269
)
 
21,624

Other current assets
 
(67,216
)
 
(6,127
)
Accounts payable and accrued liabilities
 
(35,817
)
 
35,674

Deferred real estate credits
 
10,097

 
11,729

Funding of defined benefit pension plan
 
(11,200
)
 
(9,300
)
Net cash provided by (used for) operating activities
 
(25,247
)
 
195,544

 
 
 
 
 
CASH FLOWS - INVESTING ACTIVITIES
 
 

 
 

Capital expenditures
 
(84,066
)
 
(65,796
)
Net cash used for investing activities
 
(84,066
)
 
(65,796
)
 
 
 
 
 
CASH FLOWS - FINANCING ACTIVITIES
 
 

 
 

Borrowings under revolving credit facilities
 
962,970

 
450,163

Repayment of borrowings under revolving credit facilities
 
(832,223
)
 
(578,569
)
Repayment of borrowings under senior secured term loan facility
 
(14,713
)
 
(14,713
)
Distribution to Parent
 
(2,181
)
 
—

Repurchase of stock
 
(1,401
)
 
(266
)
Shares withheld for remittance of employee taxes
 
(303
)
 
(332
)
Net cash provided by (used for) financing activities
 
112,149

 
(143,717
)
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
(8
)
 
518

 
 
 
 
 
CASH AND CASH EQUIVALENTS
 
 

 
 

Increase (decrease) during the period
 
2,828

 
(13,451
)
Beginning balance
 
38,510

 
49,239

Ending balance
 
$
41,338

 
$
35,788

 
 
 
 
 
Supplemental Schedule of Cash Flow Information
 
 

 
 

Cash paid (received) during the period for:
 
 

 
 

Interest
 
$
152,845

 
$
115,137

Income taxes
 
$
(6,882
)
 
$
(2,650
)
Non-cash - investing and financing activities:
 
 

 
 

Distribution to Parent
 
$
271,345

 
$
—

Property and equipment acquired through developer financing obligations
 
$
—

 
$
4,277

Issuance of PIK Toggle Notes
 
$
—

 
$
28,500

See Notes to Condensed Consolidated Financial Statements.

4

NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF MEMBER EQUITY
(UNAUDITED)
(in thousands)
 
Member
capital
 
Accumulated
other
comprehensive
earnings (loss)
 
Retained
earnings
(deficit)
 
Total member
equity
 
 
 
 
 
 
 
 
 
Balance at October 27, 2018
 
$
1,324,666

 
$
(37,317
)
 
$
(838,598
)
 
$
448,751

Stock option exercises and other
 
450

 
—

 
—

 
450

Comprehensive loss:
 
 
 
 
 
 
 
 
Net loss
 
—

 
—

 
(29,006
)
 
(29,006
)
Adjustments for fluctuations in fair market value of financial instruments, net of tax of ($1,774)
 
—

 
(5,074
)
 
—

 
(5,074
)
Reclassification to earnings, net of tax of ($682)
 
—

 
(1,951
)
 
—

 
(1,951
)
Change in unfunded benefit obligations, net of tax of ($93)
 
—

 
(265
)
 
—

 
(265
)
Total comprehensive loss
 
 
 
 
 
 
 
(36,296
)
Balance at January 26, 2019
 
$
1,325,116

 
$
(44,607
)
 
$
(867,604
)
 
$
412,905


(in thousands)
 
Member
capital
 
Accumulated
other
comprehensive
earnings (loss)
 
Retained
earnings
(deficit)
 
Total member
equity
 
 
 
 
 
 
 
 
 
Balance at October 28, 2017
 
$
1,587,813

 
$
(53,034
)
 
$
(1,083,220
)
 
$
451,559

Stock option exercises and other
 
268

 
—

 
—

 
268

Comprehensive earnings:
 
 
 
 
 
 
 
 
Net earnings
 
—

 
—

 
372,532

 
372,532

Foreign currency translation adjustments, net of tax of ($18)
 
—

 
4,567

 
—

 
4,567

Adjustments for fluctuations in fair market value of financial instruments, net of tax of $4,313
 
—

 
9,448

 
—

 
9,448

Reclassification to earnings, net of tax of $387
 
—

 
646

 
—

 
646

Change in unfunded benefit obligations, net of tax of ($4)
 
—

 
(6
)
 
—

 
(6
)
Total comprehensive earnings
 
 
 
 
 
 
 
387,187

Balance at January 27, 2018
 
$
1,588,081

 
$
(38,379
)
 
$
(710,688
)
 
$
839,014


5

NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF MEMBER EQUITY
(UNAUDITED)
(in thousands)
 
Member
capital
 
Accumulated
other
comprehensive
earnings (loss)
 
Retained
earnings
(deficit)
 
Total member
equity
 
 
 
 
 
 
 
 
 
Balance at July 28, 2018
 
$
1,587,350

 
$
(22,297
)
 
$
(805,872
)
 
$
759,181

Cumulative accounting transition adjustments
 
—

 
(7,597
)
 
14,724

 
7,127

Distribution to Parent

 
(262,905
)
 
8,658

 
(19,279
)
 
(273,526
)
Stock option exercises and other
 
671

 
—

 
—

 
671

Comprehensive loss:
 


 


 


 


Net loss
 
—

 
—

 
(57,177
)
 
(57,177
)
Foreign currency translation adjustments, net of tax of ($333)
 
—

 
(1,502
)
 
—

 
(1,502
)
Adjustments for fluctuations in fair market value of financial instruments, net of tax of ($1,572)
 
—

 
(4,498
)
 
—

 
(4,498
)
Reclassification to earnings, net of tax of ($1,180)
 
—

 
(3,375
)
 
—

 
(3,375
)
Change in unfunded benefit obligations, net of tax of ($4,893)
 
—

 
(13,996
)
 
—

 
(13,996
)
Total comprehensive loss
 


 


 


 
(80,548
)
Balance at January 26, 2019
 
$
1,325,116

 
$
(44,607
)
 
$
(867,604
)
 
$
412,905


(in thousands)
 
Member
capital
 
Accumulated
other
comprehensive
earnings (loss)
 
Retained
earnings
(deficit)
 
Total member
equity
 
 
 
 
 
 
 
 
 
Balance at July 29, 2017
 
$
1,587,086

 
$
(63,431
)
 
$
(1,057,003
)
 
$
466,652

Stock option exercises and other
 
995

 
—

 
—

 
995

Comprehensive earnings:
 


 


 


 


Net earnings
 
—

 
—

 
346,315

 
346,315

Foreign currency translation adjustments, net of tax of $2,435
 
—

 
10,721

 
—

 
10,721

Adjustments for fluctuations in fair market value of financial instruments, net of tax of $6,332
 
—

 
12,578

 
—

 
12,578

Reclassification to earnings, net of tax of $873
 
—

 
1,399

 
—

 
1,399

Change in unfunded benefit obligations, net of tax of $228
 
—

 
354

 
—

 
354

Total comprehensive earnings
 


 


 


 
371,367

Balance at January 27, 2018
 
$
1,588,081

 
$
(38,379
)
 
$
(710,688
)
 
$
839,014



6

NEIMAN MARCUS GROUP LTD LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 
1. Basis of Presentation
 
Neiman Marcus Group LTD LLC (the "Company") is a luxury omni-channel retailer conducting store and online operations principally under the Neiman Marcus, Bergdorf Goodman and Last Call brand names. References to "we," "our" and "us" are used to refer to the Company or collectively to the Company and its subsidiaries, as appropriate to the context.

The Company is a subsidiary of Mariposa Intermediate Holdings LLC ("Holdings"), which in turn is a subsidiary of Neiman Marcus Group, Inc., a Delaware corporation ("Parent"). Parent is owned by entities affiliated with Ares Management, L.P. and Canada Pension Plan Investment Board (together, the "Sponsors") and certain co-investors. The Sponsors acquired the Company on October 25, 2013 (the "Acquisition"). The Company's operations are conducted through its direct wholly owned subsidiary, The Neiman Marcus Group LLC ("NMG").

In October 2014, we acquired MyTheresa, a luxury retailer headquartered in Munich, Germany. The operations of MyTheresa are conducted primarily through the mytheresa.com website. In September 2018, substantially all of the holdings of NMG International LLC were distributed to NMG, to the Company, to Holdings and, ultimately, to Parent (the "Distribution"). These holdings consisted principally of the entities through which we had conducted the operations of MyTheresa. As a result of the Distribution, MyTheresa is no longer a subsidiary of the Company but rather a subsidiary of our Parent. Subsequent to the Distribution, the assets, liabilities and operating results of MyTheresa are excluded from our Condensed Consolidated Financial Statements. The assets and liabilities of MyTheresa are excluded from the Condensed Consolidated Balance Sheet presented as of January 26, 2019 and included in the Condensed Consolidated Balance Sheets presented as of July 28, 2018 and January 27, 2018. Our Condensed Consolidated Statements of Operations exclude the operating results of MyTheresa for the second quarter of fiscal year 2019 and include the operating results of MyTheresa for only the two months prior to the Distribution in year-to-date fiscal 2019. As it relates to the second quarter of fiscal year 2018 and year-to-date fiscal 2018, the operating results of MyTheresa are included for all periods presented.

The accompanying Condensed Consolidated Financial Statements set forth financial information of the Company and its subsidiaries on a consolidated basis.  All significant intercompany accounts and transactions have been eliminated.

Our fiscal year ends on the Saturday closest to July 31.  Like many other retailers, we follow a 4-5-4 reporting calendar, which means that each fiscal quarter consists of thirteen weeks divided into periods of four weeks, five weeks and four weeks.  All references to (i) the second quarter of fiscal year 2019 relate to the thirteen weeks ended January 26, 2019 (ii) the second quarter of fiscal year 2018 relate to the thirteen weeks ended January 27, 2018, (iii) year-to-date fiscal 2019 relate to the twenty-six weeks ended January 26, 2019 and (iv) year-to-date fiscal 2018 relate to the twenty-six weeks ended January 27, 2018.
 
We have prepared the accompanying Condensed Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and Rule 10-01 of Regulation S-X of the Securities Act of 1933, as amended.  Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 28, 2018. In our opinion, the accompanying Condensed Consolidated Financial Statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows for the applicable interim periods.
 
The luxury retail industry is seasonal in nature, with higher sales typically generated in the fall and holiday selling seasons. Due to seasonal and other factors, the results of operations for the second quarter of fiscal year 2019 are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year as a whole.

Certain prior period income statement amounts have been reclassified for comparability with the current year presentation related to the inclusion of income from our credit card program within revenues and the correction of our previous income statement classification of certain reserves for sales returns and promotional programs. The reclassifications have no net impact on the presentation of net earnings (loss) in the Condensed Consolidated Financial Statements.
 
A detailed description of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.


7

Use of Estimates.  We are required to make estimates and assumptions about future events in preparing our financial statements in conformity with GAAP. These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the accompanying Condensed Consolidated Financial Statements.
 
While we believe that our past estimates and assumptions have been materially accurate, the amounts currently estimated are subject to change if different assumptions as to the outcome of future events were made. We evaluate our estimates and assumptions on an ongoing basis and predicate those estimates and assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances. We make adjustments to our estimates and assumptions when facts and circumstances dictate. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates and assumptions used in preparing the accompanying Condensed Consolidated Financial Statements.

We believe the following critical accounting policies, among others, encompass the more significant estimates, assumptions and judgments used in the preparation of the accompanying Condensed Consolidated Financial Statements:

•
recognition of revenues;
•
valuation of merchandise inventories, including determination of original retail values, recognition of markdowns and merchandise allowances, estimation of inventory shrinkage and determination of cost of goods sold;
•
determination of impairment of intangible and long-lived assets;
•
measurement of liabilities related to our loyalty program;
•
recognition of income taxes; and
•
measurement of accruals for general liability, workers’ compensation and health insurance claims and pension and postretirement health care benefits.

Segments. We conduct our specialty retail store and online operations on an omni-channel basis. As our store and online operations have similar economic characteristics, products, services and customers, our operations constitute a single omni-channel reportable segment.
 
Revenue Recognition. In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("Revenue Standard"), to clarify the principles for revenue recognition. The standard outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers and supersedes previous revenue recognition guidance. We adopted the revenue recognition requirements of this guidance in the first quarter of fiscal year 2019 using the modified retrospective adoption method and applied the ASU only to contracts not completed as of July 29, 2018. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements, but impacted the presentation of certain revenue transactions. These changes include (i) the gross balance sheet presentation of estimates for sales returns and related recoverable inventories within other current assets and (ii) the inclusion of income from our credit card program within revenues. Prior to the adoption of this guidance, our estimates of recoverable inventories were netted with our reserves for estimated sales returns within accrued liabilities. In addition, the adoption of this guidance accelerated the recognition of (i) online sales to the time of shipment rather than delivery (to coincide with the transfer of control to the customer) and (ii) direct response advertising costs to incurrence. Upon adoption, we recorded a net cumulative effect adjustment to reduce beginning accumulated deficit of $7.1 million.

In addition, we have determined that our previous income statement classification of certain reserves for sales returns and promotional programs resulted in the overstatement of previously reported revenues and cost of goods sold by $2.1 million in the second quarter of fiscal year 2018 and $26.7 million in year-to-date fiscal 2018. We evaluated the effects of these overstatements on prior periods' consolidated financial statements, individually and in the aggregate, and concluded that no prior period is materially misstated. However, we have revised our consolidated financial statements for the periods presented herein. The corrections had no impact on net earnings (loss).

We recognize revenues at the point-of-sale or upon shipment of goods to the customer. Shipping and handling costs are expensed as a fulfillment activity at shipping point. Revenues are reduced when our customers return goods previously purchased. We maintain reserves for anticipated sales returns based primarily on our historical trends and our expectations of future returns. Revenues exclude sales taxes collected from our customers.

Other Newly Adopted Accounting Pronouncements. In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit

8

Cost, which requires employers to disaggregate and present the service cost component in the same line of the income statement as other compensation costs and present the other components of net benefit costs, primarily interest costs and investment earnings, separately from the service cost component, outside a subtotal of operating earnings. We adopted this guidance in the first quarter of fiscal year 2019 using the retrospective adoption method and reclassified other components of net benefit costs from selling, general and administrative expenses to benefit plan expense, net. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive loss to retained earnings for certain stranded tax effects resulting from the Tax Cuts and Jobs Act ("Tax Reform"), which was signed into law on December 22, 2017. The new guidance may be applied either in the period of adoption or retrospectively to each period in which the effect of the Tax Reform is recognized. We adopted this guidance in the first quarter of fiscal year 2019 and reclassified $7.6 million of stranded tax benefits from accumulated other comprehensive loss to reduce accumulated deficit.

Recent Accounting Pronouncements. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), that requires a lessee to recognize assets and liabilities arising from leases on the balance sheet. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. Previous GAAP did not require lease assets and liabilities to be recognized for operating leases. Additionally, companies are permitted to make an accounting policy election not to recognize lease assets and liabilities for leases with a term of 12 months or less. For both finance leases and operating leases, the lease liability should be initially measured at the present value of the remaining contractual lease payments. In July 2018, the FASB amended the new leases standard to provide entities with an additional and optional transition method and to provide entities with a practical expedient, whereby entities may elect not to separate lease and non-lease components when certain conditions are met. We are in the process of identifying our population of leases, reviewing current accounting policies and changes to business processes and controls to support the adoption of the new standard and evaluating the impact of adoption on our Consolidated Financial Statements. We do not expect the recognition, measurement and presentation of expenses and cash flows arising from our operating leases to significantly change under this new guidance. However, we expect this adoption to lead to a material increase in the assets and liabilities recorded on our Consolidated Balance Sheets. This new guidance is effective for us as of the first quarter of fiscal year 2020.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, to simplify how hedge accounting arrangements are accounted for and presented in the financial statements, including the assessment of hedge effectiveness. Under the new standard, all changes in the fair value of cash flow hedges included in the assessment of effectiveness will be recorded in other comprehensive earnings (loss) and reclassified to earnings in the same income statement line item when the hedged item affects earnings. This new guidance is effective for us as of the first quarter of fiscal year 2020. We are currently evaluating the impact of adopting this new accounting guidance on our Consolidated Financial Statements.

In June 2018, the FASB issued ASU No. 2018-07—Compensation—Stock Compensation (Topic 718): Improvements to Non-Employee Share-Based Payment Accounting, to align accounting for non-employee share-based payment transactions with the guidance for share-based payments to employees. Under the new standard, the measurement of equity-classified non-employee awards will be fixed at the grant date. This new guidance is effective for us as of the first quarter of fiscal year 2020. Early adoption is permitted. We do not believe this new accounting guidance will have an impact on our Consolidated Financial Statements. We intend to early adopt this guidance in the third quarter of fiscal year 2019.


2. Distribution to Parent

In September 2018, substantially all of the holdings of NMG International LLC were distributed to NMG, to the Company, to Holdings and, ultimately, to Parent. These holdings consisted principally of the entities through which we conducted the operations of MyTheresa.

As a result of the Distribution, the MyTheresa entities are no longer subsidiaries of the Company but rather subsidiaries of our Parent. The MyTheresa entities are no longer included in the Company's Condensed Consolidated Financial Statements subsequent to September 2018.


9

Summarized financial information related to the balances and results of operations of the distributed holdings prior to the Distribution is as follows:
(in thousands)
At Distribution
 
July 28,
2018
 
January 27, 2018
 
 
 
 
 
 
Total assets (1)
$
356,520

 
$
351,982

 
$
349,307

Net assets (1)
273,526

 
266,784

 
266,606

 
(1)
Assets at the Distribution include $2.2 million of cash and cash equivalents on hand.

 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
January 26, 2019
 
January 27, 2018
 
January 26, 2019
 
January 27, 2018
 
 
 
 
 
 
 
 
Revenues (1)
$
—

 
$
88,707

 
$
60,063

 
$
162,801

Net earnings (loss) (1)
—

 
5,368

 
(637
)
 
7,378

 
(1)
Our Condensed Consolidated Statements of Operations exclude the operating results of MyTheresa for the second quarter of fiscal year 2019 and include the operating results of MyTheresa for only the two months prior to the Distribution in year-to-date fiscal 2019. As it relates to the second quarter of fiscal year 2018 and year-to-date fiscal 2018, the operating results of MyTheresa are included for all periods presented.


3. Revenues

In the first quarter of fiscal year 2019, we adopted the Revenue Standard using the modified retrospective adoption method and applied the ASU only to contracts not completed as of July 29, 2018. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements, but impacted the presentation of certain revenue transactions.

Disaggregation of Revenues. The components of disaggregated revenues are as follows:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
 
January 26, 2019
 
January 27, 2018
 
January 26, 2019
 
January 27, 2018
(in thousands, except percentages)
 
$
 
% of revenues
 
$
 
% of revenues
 
$
 
% of revenues
 
$
 
% of revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales from U.S. store operations (1)
 
$
946,965

 
68.6
%
 
$
975,689

 
70.1
%
 
$
1,673,732

 
69.4
%
 
$
1,714,496

 
71.1
%
Net sales from U.S. online operations (1)
 
433,358

 
31.4
%
 
415,650

 
29.9
%
 
739,312

 
30.6
%
 
698,431

 
28.9
%
Net sales from U.S. operations (2)
 
1,380,323

 
99.0
%
 
1,391,339

 
93.1
%
 
2,413,044

 
96.6
%
 
2,412,927

 
92.7
%
Net sales from MyTheresa operations (2) (3)
 
—

 
—
%
 
88,707

 
5.9
%
 
60,063

 
2.4
%
 
162,801

 
6.3
%
Total net sales (2)
 
1,380,323

 
99.0
%
 
1,480,046

 
99.1
%
 
2,473,107

 
99.0
%
 
2,575,728

 
99.0
%
Other revenues, net (2)
 
13,797

 
1.0
%
 
14,065

 
0.9
%
 
25,404

 
1.0
%
 
25,929

 
1.0
%
Total revenues (2)
 
$
1,394,120

 
100.0
%
 
$
1,494,111

 
100.0
%
 
$
2,498,511

 
100.0
%
 
$
2,601,657

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales from total online operations (2)
 
$
433,358

 
31.1
%
 
$
504,357

 
33.8
%
 
$
799,375

 
32.0
%
 
$
861,232

 
33.1
%
 
(1)
Presented on the basis of net sales from U.S. operations.
(2)
Presented on the basis of total revenues.
(3)
Our Condensed Consolidated Statements of Operations exclude the operating results of MyTheresa for the second quarter of fiscal year 2019 and include the operating results of MyTheresa for only the two months prior to the Distribution in year-to-date fiscal 2019. As it relates to the second quarter of fiscal year 2018 and year-to-date fiscal 2018, the operating results of MyTheresa are included for all periods presented.

10

Other revenues, net is principally composed of payments we receive related to our proprietary credit card program pursuant to an agreement (the "Program Agreement") with a third-party credit provider. We have credit cards and non-card payment plans under both the "Neiman Marcus" and "Bergdorf Goodman" brand names. We receive payments based on sales transacted on our proprietary credit cards. These payments are based on the profitability of the credit card portfolio as determined under the Program Agreement and are impacted by a number of factors including credit losses incurred and our allocable share of the profits generated by the credit card portfolio, which in turn may be impacted by credit ratings as determined by various rating agencies. In addition, we receive payments for marketing and servicing activities we provide, which are immaterial to the Condensed Consolidated Financial Statements. We recognize income from our credit card program when earned. The Program Agreement expires July 2020, subject to early termination provisions.

Contract Liabilities. Under the new Revenue Standard, contract liabilities relate to the transfer of goods or services to customers, consisting principally of unearned revenue, gift cards, loyalty points and other credits outstanding, and are included within accrued liabilities. Contract liabilities aggregated $250.0 million at January 26, 2019 and $218.8 million at July 28, 2018.

Revenues recognized from our beginning contract liabilities were $64.4 million during the second quarter of fiscal year 2019 and $106.3 million in year-to-date fiscal 2019.


4. Fair Value Measurements
 
Certain of our assets and liabilities are required to be measured at fair value on a recurring basis. Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. Assets and liabilities are classified using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value as follows:

•
Level 1 — Unadjusted quoted prices for identical instruments traded in active markets.
•
Level 2 — Observable market-based inputs or unobservable inputs corroborated by market data.
•
Level 3 — Unobservable inputs reflecting management’s estimates and assumptions.

The following table shows the Company’s financial asset and liability that are required to be measured at fair value on a recurring basis in our Condensed Consolidated Balance Sheets:
(in thousands)
 
Fair Value
Hierarchy
 
January 26,
2019
 
July 28,
2018
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Asset:
 
 
 
 
 
 
 
 
Interest rate swaps (included in other long-term assets)
 
Level 2
 
$
24,753

 
$
35,649

 
$
25,996

 
 
 
 
 
 
 
 
 
Liability:
 
 
 
 
 
 
 
 
Stock-based award liability (included in other long-term liabilities)
 
Level 3
 
6,871

 
8,807

 
5,643

 
The fair value of the interest rate swaps is estimated using industry standard valuation models using market-based observable inputs, including interest rate curves.

Because Parent is privately held and there is no public market for its common stock, the fair market value of Parent's common stock is determined by the Board of Directors of Parent (the "Parent Board") or the Compensation Committee, as applicable.  In determining the fair market value of Parent's common stock, the Parent Board or the Compensation Committee, as applicable, considers such factors as any recent transactions involving Parent's common stock, the Company’s actual and projected financial results, the principal amount of the Company’s indebtedness, valuations of the Company performed by third parties and other factors it believes are material to the valuation process. Significant inputs to the common stock valuation model are updated as applicable and the carrying value of the obligation is adjusted to its estimated fair value at each reporting date.


11

The carrying values of cash and cash equivalents, credit card receivables and accounts payable approximate fair value due to their short-term nature.  We determine the fair value of our long-term debt on a non-recurring basis, which results are summarized as follows:
 
 
 
 
January 26, 2019
 
July 28, 2018
 
January 27, 2018
(in thousands)
 
Fair Value
Hierarchy
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Asset-Based Revolving Credit Facility
 
Level 2
 
$
272,000

 
$
272,000

 
$
159,000

 
$
159,000

 
$
132,000

 
$
132,000

mytheresa.com Credit Facilities
 
Level 2
 
—

 
—

 
—

 
—

 
2,593

 
2,593

Senior Secured Term Loan Facility
 
Level 2
 
2,795,494

 
2,461,796

 
2,810,207

 
2,492,316

 
2,824,920

 
2,395,899

Cash Pay Notes
 
Level 2
 
960,000

 
396,672

 
960,000

 
609,302

 
960,000

 
613,565

PIK Toggle Notes
 
Level 2
 
658,354

 
282,881

 
658,354

 
420,997

 
628,500

 
373,958

2028 Debentures
 
Level 2
 
122,997

 
88,058

 
122,890

 
103,570

 
122,783

 
90,831


We estimated the fair value of long-term debt using (i) prevailing market rates for debt of similar remaining maturities and credit risk for the senior secured asset-based revolving credit facility (as amended, the "Asset-Based Revolving Credit Facility") and the senior secured term loan facility (as amended, the "Senior Secured Term Loan Facility" and, together with the Asset-Based Revolving Credit Facility, the "Senior Secured Credit Facilities") and (ii) quoted market prices of the same or similar issues for the $960.0 million aggregate principal amount of 8.00% Senior Cash Pay Notes due 2021 (the "Cash Pay Notes"), the $658.4 million aggregate principal amount of 8.75%/9.50% Senior PIK Toggle Notes due 2021 (the "PIK Toggle Notes") and the $125.0 million aggregate principal amount of 7.125% Debentures due 2028 (the "2028 Debentures" and, together with the Cash Pay Notes and the PIK Toggle Notes, the "Notes").
 
In connection with purchase accounting, we adjusted the carrying values of our long-lived and intangible assets to their estimated fair values at the acquisition date. The fair value estimates were based upon assumptions related to the future cash flows, discount rates and asset lives utilizing currently available information, and in some cases, valuation results from independent valuation specialists (Level 3 determination of fair value). Subsequent to the Acquisition, we determine the fair value of our long-lived and intangible assets on a non-recurring basis in connection with our periodic evaluations of such assets for potential impairment and record impairment charges when such fair value estimates are lower than the carrying values of the assets.


5. Intangible Assets, Net and Goodwill
 
(in thousands)
 
January 26,
2019
 
July 28,
2018
 
January 27,
2018
 
 
 
 
 
 
 
Favorable lease commitments, net
 
$
854,032

 
$
879,434

 
$
905,016

Other definite-lived intangible assets, net (1)
 
329,689

 
354,542

 
377,652

Tradenames (1)
 
1,432,077

 
1,501,327

 
1,503,373

Intangible assets, net
 
$
2,615,798

 
$
2,735,303

 
$
2,786,041

 
 
 
 
 
 
 
Goodwill (1)
 
$
1,753,245

 
$
1,883,869

 
$
1,887,729

 
(1)
In connection with the Distribution in September 2018, goodwill, tradenames and other definite-lived intangible assets, net related to MyTheresa were distributed to Parent. The assets and liabilities of MyTheresa are excluded from the Condensed Consolidated Balance Sheet presented as of January 26, 2019 and included in the Condensed Consolidated Balance Sheets presented as of July 28, 2018 and January 27, 2018.

Intangible Assets Subject to Amortization. Favorable lease commitments are amortized straight-line over the remaining lives of the leases, ranging from five to 55 years (weighted average life of 30 years) from the Acquisition date. Our definite-lived intangible assets, which primarily consist of customer lists, are amortized using accelerated methods which reflect the pattern in which we receive the economic benefit of the asset, currently estimated at ten to 16 years (weighted average life of 14 years) from the Acquisition date. 


12

Total amortization of all intangible assets recorded in connection with acquisitions for the current and next five fiscal years is currently estimated as follows (in thousands):
January 27, 2019 through August 3, 2019
$
46,219

2020
85,778

2021
81,312

2022
81,539

2023
80,385

2024
64,469


At January 26, 2019, accumulated amortization was $273.4 million for favorable lease commitments and $353.9 million for other definite-lived intangible assets.

Indefinite-lived Intangible Assets and Goodwill.  Indefinite-lived intangible assets, such as our Neiman Marcus and Bergdorf Goodman tradenames and goodwill, are not subject to amortization.  Rather, we assess the recoverability of indefinite-lived intangible assets and goodwill annually in the fourth quarter of each fiscal year and upon the occurrence of certain events. These impairment assessments are performed for two of our reporting units — Neiman Marcus and Bergdorf Goodman.


6. Long-term Debt
 
The significant components of our long-term debt are as follows:
(in thousands)
 
Interest
Rate
 
January 26,
2019
 
July 28,
2018
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
variable
 
$
272,000

 
$
159,000

 
$
132,000

mytheresa.com Credit Facilities (1)
 
variable
 
—

 
—

 
2,593

Senior Secured Term Loan Facility
 
variable
 
2,795,494

 
2,810,207

 
2,824,920

Cash Pay Notes
 
8.00%
 
960,000

 
960,000

 
960,000

PIK Toggle Notes
 
8.75%/9.50%
 
658,354

 
658,354

 
628,500

2028 Debentures
 
7.125%
 
122,997

 
122,890

 
122,783

Total debt
 
 
 
4,808,845

 
4,710,451

 
4,670,796

Less: current portion of Senior Secured Term Loan Facility
 
 
 
(29,426
)
 
(29,426
)
 
(29,426
)
Less: unamortized debt issuance costs
 
 
 
(46,637
)
 
(57,873
)
 
(69,108
)
Long-term debt, net of debt issuance costs
 
 
 
$
4,732,782

 
$
4,623,152

 
$
4,572,262

 
(1)
Credit facilities of MyTheresa are excluded subsequent to the Distribution in September 2018.

Asset-Based Revolving Credit Facility.  At January 26, 2019, we have an Asset-Based Revolving Credit Facility with a maximum committed borrowing capacity of $900.0 million.  The Asset-Based Revolving Credit Facility matures on July 25, 2021 (or July 25, 2020 if our obligations under our Senior Secured Term Loan Facility or any permitted refinancing thereof have not been repaid or the maturity date thereof has not been extended to October 25, 2021 or later). At January 26, 2019, we had outstanding borrowings of $272.0 million under this facility, outstanding letters of credit of $1.3 million and unused commitments of $626.8 million, subject to a borrowing base, of which $90.0 million of such capacity is available to us subject to certain restrictions as more fully described below.
 
Availability under the Asset-Based Revolving Credit Facility is subject to a borrowing base.  The Asset-Based Revolving Credit Facility includes borrowing capacity available for letters of credit (up to $150.0 million, with any such issuance of letters of credit reducing the amount available under the Asset-Based Revolving Credit Facility on a dollar-for-dollar basis) and for borrowings on same-day notice.  The borrowing base is equal to at any time the sum of (a) 90% of the net orderly liquidation value of eligible inventory, net of certain reserves, plus (b) 90% of the amounts owed by credit card processors in respect of eligible credit card accounts constituting proceeds from the sale or disposition of inventory, less certain reserves, plus (c) 100% of segregated cash held in a restricted deposit account.  To the extent that excess availability is not equal to or greater than the greater of (a) 10% of the lesser of (1) the aggregate revolving commitments and (2) the borrowing base and (b) $50.0 million, we will be required to maintain a minimum fixed charge coverage ratio. Additional restrictions will apply if this condition is not met for five consecutive business days, including increased reporting requirements and additional administrative agent control rights over certain of our accounts. These restrictions will continue until the condition is satisfied and their imposition may limit our operational flexibility.

13

The Asset-Based Revolving Credit Facility permits us to increase commitments under the Asset-Based Revolving Credit Facility or add one or more incremental term loans to the Asset-Based Revolving Credit Facility by an amount not to exceed $200.0 million. However, the lenders are under no obligation to provide any such additional commitments or loans, and any increase in commitments or incremental term loans will be subject to customary conditions precedent.  If we were to request any such additional commitments and the existing lenders or new lenders were to agree to provide such commitments, the size of the Asset-Based Revolving Credit Facility could be increased to $1,100.0 million, but our ability to borrow would still be limited by the amount of the borrowing base.  The cash proceeds of any incremental term loans may be used for working capital and general corporate purposes.

At January 26, 2019, borrowings under the Asset-Based Revolving Credit Facility bore interest at a rate per annum equal to, at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate of Deutsche Bank AG New York Branch (the administrative agent), (2) the federal funds effective rate plus ½ of 1.00% and (3) the adjusted one-month LIBOR plus 1.00% or (b) LIBOR, subject to certain adjustments, in each case plus an applicable margin of 0.75% with respect to base rate borrowings and 1.75% with respect to LIBOR borrowings at January 26, 2019. The applicable margin is based on the average historical excess availability under the Asset-Based Revolving Credit Facility, and is up to 1.00% with respect to base rate borrowings and up to 2.00% with respect to LIBOR borrowings, in each case with one 0.25% step down based on achievement and maintenance of a certain senior secured first lien net leverage ratio (as defined in the credit agreement governing the Asset-Based Revolving Credit Facility). The weighted average interest rate on the outstanding borrowings pursuant to the Asset-Based Revolving Credit Facility was 4.57% at January 26, 2019. In addition, we are required to pay a commitment fee in respect of unused commitments at a rate of up to 0.375% per annum. We must also pay customary letter of credit fees and agency fees.

If at any time the aggregate amount of outstanding revolving loans, unreimbursed letter of credit drawings and undrawn letters of credit under the Asset-Based Revolving Credit Facility exceeds the lesser of (a) the aggregate revolving commitments and (b) the borrowing base, we will be required to repay outstanding loans or cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of the commitment amount.  If the excess availability under the Asset-Based Revolving Credit Facility is less than the greater of (a) 10% of the lesser of (1) the aggregate revolving commitments and (2) the borrowing base and (b) $50.0 million for a period of five or more consecutive business days, funds held in a collection account maintained with the agent would be applied to repay the loans and other obligations and cash collateralize letters of credit. We would then be required to make daily deposits in the collection account maintained with the agent under the Asset-Based Revolving Credit Facility.

We may voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans at any time without premium or penalty other than customary breakage costs with respect to LIBOR loans. There is no scheduled amortization under the Asset-Based Revolving Credit Facility. The principal amount of the revolving loans outstanding thereunder will be due and payable in full on July 25, 2021 (or July 25, 2020 if our obligations under our Senior Secured Term Loan Facility or any permitted refinancing thereof have not been repaid or the maturity date thereof has not been extended to October 25, 2021 or later).
 
The Asset-Based Revolving Credit Facility is guaranteed by Holdings and each of our current and future direct and indirect wholly owned subsidiaries (subsidiary guarantors) other than (a) unrestricted subsidiaries, (b) certain immaterial subsidiaries, (c) foreign subsidiaries and any domestic subsidiary of a foreign subsidiary, (d) certain holding companies of foreign subsidiaries, (e) captive insurance subsidiaries, not for profit subsidiaries, or a subsidiary which is a special purpose entity for securitization transactions or like special purposes and (f) any subsidiary that is prohibited by applicable law or contractual obligation from acting as a guarantor or which would require governmental approval to provide a guarantee. At January 26, 2019, the assets of non-guarantor subsidiaries, primarily Nancy Holdings LLC, which holds legal title to certain real property used by us in conducting our operations, aggregated $88.6 million, or 1.2% of consolidated total assets. All obligations under the Asset-Based Revolving Credit Facility, and the guarantees of those obligations, are secured, subject to certain significant exceptions by substantially all of the assets of Holdings, the Company and the subsidiary guarantors.

The Asset-Based Revolving Credit Facility contains covenants limiting, among other things, dividends and other restricted payments, investments, loans, advances and acquisitions, and prepayments or redemptions of other indebtedness. These covenants permit such restricted actions in an unlimited amount, subject to the satisfaction of certain payment conditions, principally that we must have (x) pro forma excess availability under the Asset-Based Revolving Credit Facility for each day of the 30-day period prior to such actions, which exceeds the greater of $90.0 million or 15% of the lesser of (a) the revolving commitments under the Asset-Based Revolving Credit Facility and (b) the borrowing base and (y) a pro forma fixed charge coverage ratio of at least 1.0 to 1.0, unless pro forma excess availability for each day of the 30-day period prior to such actions under the Asset-Based Revolving Credit Facility would exceed the greater of (1) $200.0 million and (2) 25% of the lesser of (i) the aggregate revolving commitments under the Asset-Based Revolving Credit Facility and (ii) the borrowing base. The Asset-Based Revolving Credit Facility also contains customary affirmative covenants and events of default, including a cross-default provision in respect of any other indebtedness that has an aggregate principal amount exceeding $50.0 million.

14

For a more detailed description of the Asset-Based Revolving Credit Facility, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.

Senior Secured Term Loan Facility.  We have a credit agreement and related security and other agreements for the $2,950.0 million Senior Secured Term Loan Facility. At January 26, 2019, the outstanding balance under the Senior Secured Term Loan Facility was $2,795.5 million. The principal amount of the loans outstanding is due and payable in full on October 25, 2020.

The Senior Secured Term Loan Facility permits us to increase the term loans or add a separate tranche of term loans by an amount not to exceed $650.0 million plus an unlimited amount that would result (a) in the case of any incremental term loan facility to be secured equally and ratably with the term loans, a senior secured first lien net leverage ratio equal to or less than 4.25 to 1.00, and (b) in the case of any incremental term loan facility to be secured on a junior basis to the term loans, to be subordinated in right of payment to the term loans or unsecured and pari passu in right of payment with the term loans, a total net leverage ratio equal to or less than the total net leverage ratio as of October 25, 2013.

At January 26, 2019, borrowings under the Senior Secured Term Loan Facility bore interest at a rate per annum equal to, at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate of Credit Suisse AG (the administrative agent), (2) the federal funds effective rate plus ½ of 1.00% and (3) the adjusted one-month LIBOR plus 1.00%, or (b) an adjusted LIBOR (for a period equal to the relevant interest period, and in any event, never less than 1.00%), subject to certain adjustments, in each case plus an applicable margin. The applicable margin is up to 2.25% with respect to base rate borrowings and up to 3.25% with respect to LIBOR borrowings. The applicable margin is subject to adjustment based on our senior secured first lien net leverage ratio. The applicable margin with respect to outstanding LIBOR borrowings was 3.25% at January 26, 2019.  The interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 5.76% at January 26, 2019.

Subject to certain exceptions and reinvestment rights, the Senior Secured Term Loan Facility requires that 100% of the net cash proceeds from certain asset sales and debt issuances and 50% (which percentage will be reduced to 25% if our senior secured first lien net leverage ratio, as defined in the credit agreement governing the Senior Secured Term Loan Facility, is equal to or less than 4.0 to 1.0 but greater than 3.5 to 1.0 and will be reduced to 0% if our senior secured first lien net leverage ratio is equal to or less than 3.5 to 1.0) from excess cash flow, as defined in the credit agreement governing the Senior Secured Term Loan Facility, for each of our fiscal years (commencing with the period ended July 26, 2015) must be used to prepay outstanding term loans under the Senior Secured Term Loan Facility at 100% of the principal amount to be prepaid, plus accrued and unpaid interest. We were not required to prepay any outstanding term loans pursuant to the annual excess cash flow requirements for fiscal year 2018.
 
We may repay all or any portion of the Senior Secured Term Loan Facility at any time, subject to redeployment costs in the case of prepayment of LIBOR borrowings other than the last day of the relevant interest period. The Senior Secured Term Loan Facility amortizes in equal quarterly installments of $7.4 million, less certain voluntary and mandatory prepayments, with the remaining balance due at final maturity.
 
The Senior Secured Term Loan Facility is guaranteed by Holdings and each of our current and future subsidiary guarantors other than (a) unrestricted subsidiaries, (b) certain immaterial subsidiaries, (c) foreign subsidiaries and any domestic subsidiary of a foreign subsidiary, (d) certain holding companies of foreign subsidiaries, (e) captive insurance subsidiaries, not for profit subsidiaries, or a subsidiary which is a special purpose entity for securitization transactions or like special purposes and (f) any subsidiary that is prohibited by applicable law or contractual obligation from acting as a guarantor or which would require governmental approval to provide a guarantee. At January 26, 2019, the assets of non-guarantor subsidiaries, primarily Nancy Holdings LLC, which holds legal title to certain real property used by us in conducting our operations, aggregated $88.6 million, or 1.2% of consolidated total assets. All obligations under the Senior Secured Term Loan Facility, and the guarantees of those obligations, are secured, subject to certain significant exceptions, by substantially all of the assets of Holdings, the Company and the subsidiary guarantors.

The credit agreement governing the Senior Secured Term Loan Facility contains a number of negative covenants and covenants related to the security arrangements for the Senior Secured Term Loan Facility. The credit agreement also contains customary affirmative covenants and events of default, including a cross-default provision in respect of any other indebtedness that has an aggregate principal amount exceeding $50.0 million.

For a more detailed description of the Senior Secured Term Loan Facility, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.

Cash Pay Notes.  The Company, along with Mariposa Borrower, Inc. as co-issuer, incurred indebtedness in the form of $960.0 million aggregate principal amount of 8.00% Senior Cash Pay Notes due 2021.  Interest on the Cash Pay Notes is payable semi-

15

annually in arrears on each April 15 and October 15.  The Cash Pay Notes are guaranteed by the same entities that guarantee the Senior Secured Term Loan Facility, other than Holdings.  The Cash Pay Notes are unsecured and the guarantees are full and unconditional.  At January 26, 2019, the redemption price at which we may redeem the Cash Pay Notes, in whole or in part, as set forth in the indenture governing the Cash Pay Notes, was 102.000%. The Cash Pay Notes mature on October 15, 2021.

For a more detailed description of the Cash Pay Notes, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.

PIK Toggle Notes.  The Company, along with Mariposa Borrower, Inc. as co-issuer, incurred indebtedness in the form of $600.0 million aggregate principal amount of 8.75%/9.50% Senior PIK Toggle Notes due 2021. At January 26, 2019, the outstanding balance under the PIK Toggle Notes was $658.4 million. The PIK Toggle Notes are guaranteed by the same entities that guarantee the Senior Secured Term Loan Facility, other than Holdings. The PIK Toggle Notes are unsecured and the guarantees are full and unconditional. At January 26, 2019, the redemption price at which we may redeem the PIK Toggle Notes, in whole or in part, as set forth in the indenture governing the PIK Toggle Notes, was 102.188%. The PIK Toggle Notes mature on October 15, 2021.

Interest on the PIK Toggle Notes is payable semi-annually in arrears on each April 15 and October 15. Prior to October 2018, interest on the PIK Toggle Notes, subject to certain restrictions, was payable (i) entirely in cash ("Cash Interest"), (ii) entirely by increasing the principal amount of the PIK Toggle Notes by the relevant interest payment amount ("PIK Interest"), or (iii) 50% in Cash Interest and 50% in PIK Interest. Cash Interest on the PIK Toggle Notes accrues at a rate of 8.75% per annum.  PIK Interest on the PIK Toggle Notes accrued at a rate of 9.50% per annum. Interest on the PIK Toggle Notes was paid entirely in cash for the first seven interest payments. We elected to pay the October 2017 and April 2018 interest payments in the form of PIK Interest, which resulted in the issuance of additional PIK Toggle Notes of $28.5 million in October 2017 and $29.9 million in April 2018. We did not elect to pay interest in the form of PIK Interest or partial PIK Interest with respect to the interest payment in October 2018. All future interest payments are required to be paid in Cash Interest.

For a more detailed description of the PIK Toggle Notes, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.

2028 Debentures.  NMG has outstanding $125.0 million aggregate principal amount of our 7.125% Senior Debentures due 2028.  The 2028 Debentures are secured by a first lien security interest on certain collateral subject to liens granted under the Senior Secured Credit Facilities. The 2028 Debentures are guaranteed on an unsecured, senior basis by the Company.  The guarantee is full and unconditional.  The 2028 Debentures are not guaranteed by any of NMG's subsidiaries. At January 26, 2019, NMG's subsidiaries consisted principally of (i) Bergdorf Goodman, Inc., through which we conduct the operations of our Bergdorf Goodman brand, (ii) NM Nevada Trust, which holds legal title to certain real property and intangible assets used by us in conducting our operations and (iii) Nancy Holdings LLC, which holds legal title to certain real property used by us in conducting our operations.  The 2028 Debentures include certain restrictive covenants and a cross-acceleration provision in respect of any other indebtedness that has an aggregate principal amount exceeding $15.0 million.  The 2028 Debentures mature on June 1, 2028.

For a more detailed description of the 2028 Debentures, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.

Maturities of Long-term Debt.  At January 26, 2019, annual maturities of long-term debt during the current and next five fiscal years and thereafter are as follows (in millions):
January 27, 2019 through August 3, 2019
$
14.7

2020
29.4

2021
3,023.4

2022
1,618.4

2023
—

2024
—

Thereafter
123.0



The previous table does not reflect future excess cash flow prepayments, if any, that may be required under the Senior Secured Term Loan Facility.

16

Interest Expense, net.  The significant components of interest expense are as follows:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
$
3,009

 
$
1,483

 
$
5,634

 
$
3,796

Senior Secured Term Loan Facility
 
37,067

 
33,814

 
73,378

 
67,232

Cash Pay Notes
 
19,200

 
19,200

 
38,400

 
38,400

PIK Toggle Notes
 
14,402

 
14,927

 
28,803

 
29,289

2028 Debentures
 
2,226

 
2,226

 
4,453

 
4,453

Amortization of debt issue costs
 
6,121

 
6,121

 
12,242

 
12,238

Capitalized interest
 
(1,136
)
 
(1,841
)
 
(2,096
)
 
(3,564
)
Other, net
 
545

 
619

 
1,169

 
803

Interest expense, net
 
$
81,434

 
$
76,549

 
$
161,983

 
$
152,647



7. Derivative Financial Instruments
 
Interest Rate Swaps. At January 26, 2019, we had outstanding floating rate debt obligations of $3,067.5 million. In April and June of 2016, we entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,400.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness. These swap agreements hedge a portion of our contractual floating rate interest commitments related to our Senior Secured Term Loan Facility from December 2016 to October 2020. As a result of the April 2016 swap agreements, our effective interest rate as to $700.0 million of floating rate indebtedness will be fixed at 4.9120% from December 2016 through October 2020. As a result of the June 2016 swap agreements, our effective interest rate as to an additional $700.0 million of floating rate indebtedness will be fixed at 4.7395% from December 2016 to October 2020. The fair value of our interest rate swap agreements was a gain of $24.8 million at January 26, 2019, $35.6 million at July 28, 2018 and $26.0 million at January 27, 2018, which amounts were included in other long-term assets. The interest rate swap agreements expire in October 2020.

We designated the interest rate swaps as cash flow hedges. As cash flow hedges, unrealized gains on our outstanding interest rate swaps are recognized as assets while unrealized losses are recognized as liabilities. Our interest rate swap agreements are highly, but not perfectly, correlated to the changes in interest rates to which we are exposed. As a result, unrealized gains and losses on our interest rate swap agreements are designated as effective or ineffective. The effective portion of such gains or losses will be recorded as a component of other comprehensive earnings (loss) while the ineffective portion of such gains or losses will be recorded as a component of interest expense.

In addition, we realize a gain or loss on our interest rate swap agreements in connection with each required interest payment on our floating rate indebtedness. The realized gains or losses effectively adjust the contractual interest requirements pursuant to the terms of our floating rate indebtedness to the interest requirements at the fixed rates established in the interest rate swap agreements. These realized gains or losses are reclassified to interest expense from accumulated other comprehensive loss.

A summary of the recorded amounts related to our interest rate swaps reflected in our Condensed Consolidated Statements of Operations is as follows:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Realized hedging (gain) loss related to interest rate swaps – included in net interest expense
 
$
(2,633
)
 
$
1,033

 
$
(4,555
)
 
$
2,272


The amount of net gains recorded in other comprehensive earnings at January 26, 2019 that is expected to be reclassified into net interest expense in the next 12 months, if interest rates remain unchanged, is approximately $13.1 million.



17

8. Income Taxes
 
Our effective income tax rates are as follows:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 

 

 

 

Effective income tax rate excluding impact of Tax Reform
 
25.3
%
 
10.9
%
 
25.5
%
 
33.3
%
Impact of Tax Reform
 
—
%
 
2,266.8
%
 
—
%
 
623.2
%
Effective income tax rate
 
25.3
%
 
2,277.7
%
 
25.5
%
 
656.5
%

Our effective income tax rate of 25.3% on the loss for the second quarter of fiscal year 2019 and 25.5% on the loss for year-to-date fiscal 2019 exceeded the federal statutory rate of 21% due primarily to state income taxes.

Included in the income tax benefit recognized in the second quarter of fiscal year 2018 is the impact of the Tax Cuts and Jobs Act ("Tax Reform"), which was signed into law on December 22, 2017. Among numerous provisions included in the Tax Reform was the reduction of the corporate federal income tax rate from 35% to 21% effective January 1, 2018. As the effective date of the Tax Reform fell five months into our fiscal year, we were subject to a blended federal statutory rate of 26.9% in fiscal year 2018. In connection with our application of the new federal statutory rate in fiscal year 2018, we measured our long-term deferred income taxes at the new lower rate and recorded non-cash benefits aggregating $391.6 million, of which amount $387.8 million was recorded in the second quarter of fiscal year 2018. Excluding the impact of the Tax Reform, our effective income tax rate of 10.9% on the loss for the second quarter of fiscal year 2018 was below the blended federal statutory rate of 26.9% due primarily to the impact of the transition to the lower annualized federal statutory rate. Our effective income tax rate of 33.3% on the loss for year-to-date fiscal 2018 exceeded the blended federal statutory rate of 26.9% due primarily to state and foreign income taxes.

At January 26, 2019, the gross amount of unrecognized tax benefits was $1.3 million ($1.0 million of which would impact our effective tax rate, if recognized).  We classify interest and penalties as a component of income tax expense and our liability for accrued interest and penalties was $0.4 million at January 26, 2019, $0.3 million at July 28, 2018 and $0.3 million at January 27, 2018.

We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. The Internal Revenue Service ("IRS") is conducting an audit of our short-year 2014 (subsequent to the Acquisition) and fiscal years 2015 through 2017 federal income tax returns. With respect to state, local and foreign jurisdictions, with limited exceptions, we are no longer subject to income tax audits for fiscal years before 2013. We believe our recorded tax liabilities as of January 26, 2019 are sufficient to cover any potential assessments made by the IRS or other taxing authorities and we will continue to review our recorded tax liabilities for potential audit assessments based upon subsequent events, new information and future circumstances. We believe it is reasonably possible that adjustments to the amounts of our unrecognized tax benefits could occur within the next 12 months as a result of settlements with tax authorities or expiration of statutes of limitations. At this time, we do not believe such adjustments will have a material impact on our Condensed Consolidated Financial Statements.
 
Subsequent to the Acquisition, Parent and its subsidiaries, including the Company, file U.S. federal income taxes as a consolidated group. The Company has elected to be treated as a corporation for U.S. federal income tax purposes and all operations of Parent are conducted through its subsidiaries, including the Company. Income taxes incurred by Parent with respect to the Company's operations are reflected in the Condensed Consolidated Financial Statements of the Company. The Company’s financial statements recognize the current and deferred income tax consequences that result from the Company’s activities during the current and preceding periods as if the Company were a separate taxpayer rather than a member of the Parent company’s consolidated income tax return group.


9. Employee Benefits
 
Description of Retirement Benefit Plans.  We currently maintain defined contribution plans consisting of a retirement savings plan ("RSP") and a defined contribution supplemental executive retirement plan ("Defined Contribution SERP Plan"). In addition, we sponsor a defined benefit pension plan ("Pension Plan") and an unfunded supplemental executive retirement plan ("SERP Plan") that provides certain employees additional pension benefits. As of the third quarter of fiscal year 2010, benefits offered to all

18

participants in our Pension Plan and SERP Plan were frozen. Retirees and active employees hired prior to March 1, 1989 are eligible for certain limited postretirement health care benefits ("Postretirement Plan") if they meet certain service and minimum age requirements. We also sponsor an unfunded key employee deferred compensation plan, which provides certain employees with additional benefits.

Our obligations for employee benefit plans, included in other long-term liabilities, are as follows:
(in thousands)
 
January 26,
2019
 
July 28,
2018
 
January 27,
2018
 
 
 
 
 
 
 
Pension Plan
 
$
208,215

 
$
202,820

 
$
230,606

SERP Plan
 
100,186

 
98,814

 
111,093

Postretirement Plan
 
2,975

 
2,935

 
6,388

 
 
311,376

 
304,569

 
348,087

Less: current portion
 
(6,550
)
 
(6,441
)
 
(6,679
)
Long-term portion of benefit obligations
 
$
304,826

 
$
298,128

 
$
341,408

 
Funding Policy and Status.  Our policy is to fund the Pension Plan at or above the minimum level required by law. As of January 26, 2019, we believe we will be required to contribute $27.6 million to the Pension Plan in fiscal year 2019, of which $11.2 million has been funded as of January 26, 2019. In fiscal year 2018, we were required to contribute $25.2 million to the Pension Plan.

Cost of Benefits. The components of the expenses we incurred under our Pension Plan, SERP Plan and Postretirement Plan are as follows:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Pension Plan:
 
 

 
 

 
 
 
 
Interest cost
 
$
5,753

 
$
4,973

 
$
11,506

 
$
9,946

Expected return on plan assets
 
(5,488
)
 
(5,396
)
 
(10,976
)
 
(10,792
)
Net amortization of losses
 
199

 
170

 
398

 
340

Pension Plan expense (income)
 
$
464

 
$
(253
)
 
$
928

 
$
(506
)
 
 
 
 
 
 
 
 
 
SERP Plan:
 
 

 
 

 
 
 
 
Interest cost
 
$
940

 
$
844

 
$
1,880

 
$
1,688

SERP Plan expense
 
$
940

 
$
844

 
$
1,880

 
$
1,688

 
 
 
 
 
 
 
 
 
Postretirement Plan:
 
 

 
 

 
 
 
 
Interest cost
 
$
25

 
$
51

 
$
50

 
$
102

Net amortization of gains
 
(556
)
 
(180
)
 
(1,113
)
 
(360
)
Postretirement Plan income
 
$
(531
)
 
$
(129
)
 
$
(1,063
)
 
$
(258
)

Employee Vacation Benefit Liability.  We enacted changes to our vacation policy effective in fiscal year 2019. Pursuant to the provisions of our new vacation policy, vacation hours earned during each fiscal year must be taken during that fiscal year. Any accrued but unused vacation is forfeited at the end of the fiscal year subject to statutory requirements in certain states precluding such forfeitures. In fiscal year 2018, we recorded a non-cash gain of $19.5 million, of which amount $7.8 million was recorded in the second quarter and $9.0 million was recorded in year-to-date fiscal 2018, within selling, general and administrative expenses, in connection with the reduction of our liability for unused vacation prior to the effective date of our new vacation policy.


10. Commitments and Contingencies
 
Employment, Benefits, and Consumer Class Actions Litigation.  In August 2015, the National Labor Relations Board ("NLRB") affirmed an administrative law judge's recommended decision and order finding that the Company's Arbitration Agreement and class action waiver violated the National Labor Relations Act ("NLRA"). We filed our petition for review of the NLRB's order with the U.S. Court of Appeals for the Fifth Circuit. This case has been stayed while another similar case has been pending before the U.S. Supreme Court, which was decided on May 21, 2018 and held that class action waivers in arbitration agreements are lawful

19

under the NLRA and must be enforced under the Federal Arbitration Act. On June 1, 2018, the NLRB filed a motion to remove this case from abeyance, grant our petition for review regarding the class action waiver issue consistent with the U.S. Supreme Court’s decision, and remand the remainder of the case to the NLRB. On June 11, 2018, the U.S. Court of Appeals for the Fifth Circuit granted the NLRB’s motion, and the remanded portion of the case is pending before the NLRB.

The Company has several wage and hour putative class action matters pending in California. The earliest, filed in December 2015 and amended in February 2016, was filed against The Neiman Marcus Group, Inc. by Holly Attia and seven other named plaintiffs, seeking to certify a class of non-exempt employees for alleged violations for failure to pay overtime wages, failure to provide meal and rest breaks, failure to reimburse business expenses, failure to timely pay wages due at termination and failure to provide accurate itemized wage statements. Plaintiffs also allege derivative claims for restitution under California unfair competition law and a representative claim for penalties under the California Labor Code Private Attorneys General Act ("PAGA"), and all related damages for alleged violations (restitution, statutory penalties under PAGA, and attorneys' fees, interest and costs of suit). The case was removed to the U.S. District Court for the Central District of California in March 2016, and the Company filed a motion to compel arbitration and requested to stay the PAGA claim. In June 2016, the court granted the motion and compelled arbitration of the individual claims. The court retained jurisdiction of the PAGA claim and stayed that claim pending the outcome of arbitration. In October 2016, the court granted the plaintiffs' motion for reconsideration of the arbitration decision based on a recent decision by the Ninth Circuit Court of Appeals in Morris v. Ernst & Young, LLP, and reversed its order compelling arbitration. The Company appealed. The parties reached an agreement in principle to settle this case, subject to court approval. The motion for preliminary approval of the settlement was filed with the court on July 24, 2018. On September 5, 2018, the district court preliminarily approved the settlement. On February 25, 2019, the court issued an order granting final approval of the settlement and entered final judgment. The associated appeal has been administratively closed due to the pending settlement of the underlying action. A PAGA representative action filed by Xuan Hien Nguyen asserting the same factual allegations as the plaintiff in Attia was resolved in connection with the Attia settlement, as Nguyen and her claims were amended into Attia. On March 4, 2019, the Nguyen case was dismissed with prejudice. A PAGA representative action filed by Milca Connolly asserting substantially identical claims and a putative class and representative action filed by Ondrea Roces and Sophia Ahmed seeking to certify a class of current and former sales associates for alleged failure to pay wages for all hours worked, recordkeeping and wage statement violations, and failure to timely pay wages due at termination have been stayed pending the settlement approval process in Attia.

On October 27, 2017, a putative class action complaint was filed against Neiman Marcus Group, Inc., The Neiman Marcus Group LLC, and Bergdorf Goodman, Inc. in the U.S. District Court for the Southern District of New York by Victor Lopez, an allegedly visually-impaired and legally blind individual, in connection with his visits to Bergdorf Goodman, Inc.’s website. Mr. Lopez alleges, on behalf of himself and those similarly situated, that Bergdorf Goodman, Inc.’s website is not fully and equally accessible to legally blind individuals, resulting in denial of access to the equal enjoyment of goods and services, in violation of the Americans with Disabilities Act and the New York State and City Human Rights Laws. The defendant Companies filed a joint answer denying the claims. The parties have reached a settlement among all parties.
    
On August 7, 2014, a putative class action complaint was filed against The Neiman Marcus Group LLC in Los Angeles County Superior Court by a customer, Linda Rubenstein, in connection with the Company's Last Call stores in California. Ms. Rubenstein alleges that the Company has violated various California consumer protection statutes by implementing a marketing and pricing strategy that suggests that clothing sold at Last Call stores in California was originally offered for sale at full-line Neiman Marcus stores when allegedly, it was not, and that the Company lacks adequate information to support its comparative pricing labels. In September 2014, we removed the case to the U.S. District Court for the Central District of California. After dismissing Ms. Rubenstein’s original and first amended complaint, the court dismissed her second amended complaint in its entirety in May 2015, without leave to amend, and Ms. Rubenstein appealed. In April 2017, the Court of Appeal reversed, holding that Ms. Rubenstein’s allegations were sufficient to proceed past the pleadings stage of litigation. The case was transferred back to the district court. On September 7, 2017, the district court issued an order permitting Ms. Rubenstein to file a proposed Third Amended Complaint, which modifies the putative class period. Additionally, Ms. Rubenstein filed a motion for class certification, which was fully briefed by both parties. The parties reached an agreement in principle to settle the case, subject to court approval. A notice of settlement was filed, and the hearing on Ms. Rubenstein’s motion for class certification was vacated. On October 1, 2018, the court granted final approval of the settlement and entered judgment accordingly. The deadline to appeal the judgment expired with no appeals and the final settlement was remitted in November 2018.
    
In addition, we are currently involved in various other legal actions and proceedings that arose in the ordinary course of business. With respect to the matters described above as well as all other current outstanding litigation involving us, we believe that any liability arising as a result of such litigation will not have a material adverse effect on our financial condition, results of operations or cash flows.


20

Cyber-Attack Class Actions Litigation. In January 2014, three class actions relating to a cyber-attack on our computer systems in 2013 (the "Cyber-Attack") were filed and later voluntarily dismissed by the plaintiffs between February and April 2014. The plaintiffs had alleged negligence and other claims in connection with their purchases by payment cards and sought monetary and injunctive relief. Three additional putative class actions relating to the Cyber-Attack were filed in March and April 2014, also alleging negligence and other claims in connection with plaintiffs’ purchases by payment cards. Two of the cases were voluntarily dismissed. The third case, Hilary Remijas v. The Neiman Marcus Group, LLC, was filed on March 12, 2014 in the U.S. District Court for the Northern District of Illinois. On June 2, 2014, an amended complaint in the Remijas case was filed, which added three plaintiffs (Debbie Farnoush and Joanne Kao, California residents; and Melissa Frank, a New York resident) and asserted claims for negligence, implied contract, unjust enrichment, violation of various consumer protection statutes, invasion of privacy and violation of state data breach laws. The Company moved to dismiss the Remijas amended complaint, and the court granted the Company's motion on the grounds that the plaintiffs lacked standing due to their failure to demonstrate an actionable injury. Plaintiffs appealed the district court's order dismissing the case to the Seventh Circuit Court of Appeals, and the Seventh Circuit Court of Appeals reversed the district court's ruling, remanding the case back to the district court. The Company filed a petition for rehearing en banc, which the Seventh Circuit Court of Appeals denied. The Company filed a motion for dismissal on other grounds, which the court denied. The parties jointly requested, and the court granted, an extension of time for filing a responsive pleading, which was due on December 28, 2016. On February 9, 2017, the court denied the parties' request for another extension of time, dismissed the case without prejudice, and stated that plaintiffs could file a motion to reinstate. On March 8, 2017, plaintiffs filed a motion to reinstate, which the court granted on March 16, 2017. On March 17, 2017, plaintiffs filed a motion seeking preliminary approval of a class action settlement resolving this action, which the court granted on June 21, 2017. On August 21, 2017, plaintiffs moved for final approval of the proposed settlement. In September 2017, purported settlement class members filed two objections to the settlement, and plaintiffs and the Company filed responses to the objections on October 19, 2017. At the fairness hearing on October 26, 2017, the Court ordered supplemental briefing on the objections. Objectors filed a supplemental brief in support of their objections on November 9, 2017, and plaintiffs and the Company filed their supplemental responses to the objections on November 21, 2017. On January 16, 2018, an order was issued by the District Court reassigning the case to Judge Sharon Johnson Coleman due to the prior judge’s retirement. On September 17, 2018, Judge Coleman denied final approval of the proposed settlement and decertified the settlement class. Judge Coleman has set a status conference for this matter for April 12, 2019. At this point, we are unable to predict the developments in, outcome of or other consequences related to this matter.

In addition to class actions litigation, payment card companies and associations may require us to reimburse them for unauthorized card charges and costs to replace cards and may also impose fines or penalties in connection with the security incident, and enforcement authorities may also impose fines or seek other remedies against us. We have also incurred other costs associated with this security incident, including legal fees, investigative fees, costs of communications with customers and credit monitoring services provided to our customers. We expect to continue to incur costs associated with maintaining appropriate security measures and otherwise complying with our obligations. We will continue to evaluate these matters based on subsequent events, new information and future circumstances.

Distribution Litigation. On December 10, 2018, Marble Ridge Capital LP and Marble Ridge Master Fund LP (collectively, “Marble Ridge”) filed a lawsuit against Parent, Holdings, the Company, NMG, and NMG International LLC in the District Court for the 116th Judicial District, Dallas County, Texas (the “Marble Ridge Litigation”).  Marble Ridge alleges that the Distribution was a fraudulent transfer.  Marble Ridge seeks to undo the Distribution and return the entities through which the operations of MyTheresa are conducted from Parent to NMG International LLC under fraudulent transfer law and appoint a receiver under Texas state law. On December 14, 2018, the Company and the other defendants filed an answer denying Marble Ridge’s allegations, counterclaimed against Marble Ridge for prior defamatory statements, and filed a plea to the jurisdiction to dismiss Marble Ridge’s lawsuit.  On January 2, 2019, Marble Ridge moved to dismiss the counterclaims brought by the Company and the other defendants.  A hearing on the Company’s plea to the jurisdiction to dismiss Marble Ridge’s claims was held on March 7, 2019 and the matter was taken under submission.  A hearing on Marble Ridge’s motion to dismiss the Company’s counterclaims is currently scheduled for March 21, 2019.  We believe that the Marble Ridge Litigation is without merit and we intend to continue to vigorously contest it.  However, we are currently unable to predict the developments in, outcome of, and economic and other consequences of the Marble Ridge Litigation.  We will continue to evaluate these matters based on subsequent events, new information and future circumstances.

Other.  We had $1.3 million of irrevocable letters of credit and $3.5 million in surety bonds outstanding at January 26, 2019, relating primarily to merchandise imports and state sales tax and utility requirements.



21

11. Accumulated Other Comprehensive Loss
 
The following table summarizes the changes in accumulated other comprehensive loss by component (amounts are recorded net of related income taxes):
(in thousands)
 
Foreign
Currency
Translation
Adjustments
 
Unrealized Gains
on
Financial
Instruments
 
Unfunded
Benefit
Obligations
 
Total
 
 
 
 
 

 
 

 
 

Balance, July 28, 2018
 
$
(7,156
)
 
$
22,253

 
$
(37,394
)
 
$
(22,297
)
Other comprehensive (loss) earnings
 
(1,502
)
 
576

 
(13,731
)
 
(14,657
)
Amounts reclassified to earnings, net
 
—

 
(1,424
)
 
—

 
(1,424
)
Distribution to Parent
 
8,658

 
—

 
—

 
8,658

Reclassification of stranded tax effects
 
—

 
2,885

 
(10,482
)
 
(7,597
)
Balance, October 27, 2018
 
$
—

 
$
24,290

 
$
(61,607
)
 
$
(37,317
)
Other comprehensive loss
 
—

 
(5,074
)
 
(265
)
 
(5,339
)
Amounts reclassified to earnings, net
 
—

 
(1,951
)
 
—

 
(1,951
)
Balance, January 26, 2019
 
$
—

 
$
17,265

 
$
(61,872
)
 
$
(44,607
)
 
The amounts reclassified from accumulated other comprehensive loss to earnings, net are recorded within interest expense on the Condensed Consolidated Statements of Operations.


12. Stock-Based Awards
 
Incentive Plans.  Parent established various incentive plans pursuant to which eligible employees, consultants and non-employee directors are eligible to receive stock-based awards.  Under the incentive plans, Parent is authorized to grant stock options, restricted stock and other types of awards that are valued in whole or in part by reference to, or are payable or otherwise based on, the shares of common stock of Parent. Charges with respect to options issued by Parent pursuant to the incentive plans are reflected by the Company in the preparation of our Condensed Consolidated Financial Statements.

Co-Invest Options.  In connection with the Acquisition, certain executive officers of the Company rolled over a portion of the amounts otherwise payable in settlement of their pre-Acquisition stock options into stock options of Parent representing options to purchase a total of 56,979 shares of common stock of Parent (the "Co-Invest Options").

Non-Qualified Stock Options.  Pursuant to the terms of the incentive plans, Parent granted time-vested and performance-vested non-qualified stock options to certain executive officers, employees and non-employee directors of the Company. These non-qualified stock options will expire no later than the tenth anniversary of the grant date.

Accounting for Stock Options. We currently account for stock options issued to certain optionees who will become retirement eligible prior to the expiration of their stock options and certain options held by our former Chief Executive Officer ("Eligible Optionees") as variable awards using the liability method as these optionees could receive a cash settlement of their awards should Parent exercise its repurchase rights with respect to such shares. Under the liability method, we recognize the estimated liability for option awards held by Eligible Optionees over the vesting periods of such awards. In periods in which the estimated fair value of our equity increases, we increase our stock compensation liability. Conversely, in periods in which the estimated fair value of our equity decreases, we reduce our stock compensation liability. These increases/decreases are recorded as stock compensation expense and are included in selling, general and administrative expenses. With respect to time-vested options held by non-Eligible Optionees, such options are effectively forfeited should the optionee voluntarily leave the Company without good reason or be terminated for cause prior to an IPO. As a result, we currently record no expense or liability with respect to such options. With respect to performance-vested options, such options are effectively forfeited should the optionee voluntarily leave the Company without good reason or be terminated for cause prior to achievement of the performance condition. As a result, we currently record no expense or liability with respect to such options. At January 26, 2019, an aggregate of 47,032 Co-Invest Options and time-vested options were held by Eligible Optionees. The recorded liability with respect to such options was $6.7 million at January 26, 2019, $7.8 million at July 28, 2018 and $5.4 million at January 27, 2018.


22

The following table sets forth certain summary information with respect to our stock options for the periods indicated:
 
 
Twenty-six weeks ended
 
 
January 26, 2019
(in actuals)
 
Shares
 
Weighted
Average
Exercise
Price
Outstanding at July 28, 2018
 
183,506

 
$
597

Granted
 
23,271

 
747

Forfeited
 
(6,999
)
 
626

Expired
 
(5,160
)
 
450

Outstanding at January 26, 2019
 
194,618

 
$
614


Restricted Stock. At January 26, 2019, 17,694 shares of unvested restricted common stock were outstanding. The recorded liability with respect to such shares was $0.2 million at January 26, 2019, $1.0 million at July 28, 2018 and $0.3 million at January 27, 2018.
 
 
Twenty-six weeks ended
 
 
January 26, 2019
(in actuals)
 
Unvested Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding at July 28, 2018
 
19,823

 
$
482

Granted
 
2,359

 
348

Vested
 
(3,552
)
 
768

Forfeited
 
(936
)
 
768

Outstanding at January 26, 2019
 
17,694

 
$
391


Stock Compensation Expense. The following table summarizes our stock-based compensation expense:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Stock compensation expense (benefit):
 
 
 
 
 
 
 
 
Stock options
 
$
(334
)
 
$
1,153

 
$
(575
)
 
$
5,406

Restricted stock
 
860

 
180

 
1,015

 
486

Total
 
$
526

 
$
1,333

 
$
440

 
$
5,892


In September 2017, the Compensation Committee approved grants of non-qualified Co-Invest Options (the "New Co-Invest Options") to certain continuing employees who previously held Co-Invest Options. The New Co-Invest Options have the effect of replacing the previous Co-Invest Options held by those employees, which were cancelled, and extending the expiration date to the tenth anniversary of the grant date. All other terms of the New Co-Invest Options remain unchanged from the terms of the cancelled Co-Invest Options. In the first quarter of fiscal year 2018, we recorded non-cash stock compensation expense aggregating $4.2 million related to the cancellation and replacement of the previous Co-Invest Options with the New Co-Invest Options.

In January 2018, the Compensation Committee determined that the exercise prices of certain time-vested stock options were higher than the current fair market value of Parent's common stock. In order to enhance the retentive value of these options, the Compensation Committee approved a repricing of 43,261 time-vested stock options to an exercise price of $500 per share. In the second quarter of fiscal year 2018, we recorded non-cash stock compensation expense aggregating $0.5 million related to the repricing of the time-vested stock options.

For a more detailed description of our stock-based awards, refer to Note 13 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.



23

13. Other Expenses
 
Other expenses consists of the following components:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Expenses incurred in connection with strategic initiatives
 
$
9,081

 
$
1,388

 
$
16,125

 
$
1,810

Expenses related to store closures
 
—

 
6,602

 
—

 
7,920

Expenses related to Cyber-Attack, net of insurance recoveries
 
—

 
—

 
—

 
1,100

Other expenses
 
2,814

 
4,624

 
5,199

 
4,624

Total
 
$
11,895

 
$
12,614

 
$
21,324

 
$
15,454


We incurred consulting and professional fees in connection with key strategic operational projects and the implementation of strategic initiatives.

In connection with our assessment of our Last Call footprint, we closed 14 stores in fiscal year 2018. Expenses related to these store closures consisted primarily of severance and store closing costs.
 
We discovered in January 2014 that malicious software was clandestinely installed on our computer systems (the "Cyber-Attack"). Expenses related to the Cyber-Attack in year-to-date fiscal 2018 consisted primarily of legal expenses.

We also incurred other expenses related to organizational and operational realignments, primarily severance costs, in the second quarter and year-to-date fiscal 2019.

In connection with the retirement of our former Chief Executive Officer and President, we incurred certain charges primarily related to lump sum compensation payable as a consequence of her retirement of approximately $4.6 million in the second quarter of fiscal year 2018.


14. Condensed Consolidating Financial Information (with respect to NMG's obligations under the Senior Secured Credit Facilities, Cash Pay Notes and PIK Toggle Notes)

All of NMG’s obligations under the Senior Secured Credit Facilities are guaranteed by Holdings and our current and future direct and indirect wholly owned subsidiaries, subject to exceptions as more fully described in Note 6.  All of NMG's obligations under the Cash Pay Notes and the PIK Toggle Notes are guaranteed by the same entities that guarantee the Senior Secured Credit Facilities, other than Holdings. Currently, the Company’s non-guarantor subsidiaries under the Senior Secured Credit Facilities, Cash Pay Notes and PIK Toggle Notes consist principally of Nancy Holdings LLC, which holds legal title to certain real property used by us in conducting our operations and described below under "— Results of Operations and Financial Condition of Unrestricted Subsidiaries". Prior to the Distribution in September 2018, the Company’s non-guarantor subsidiaries under the Senior Secured Credit Facilities, Cash Pay Notes and PIK Toggle Notes also included NMG Germany GmbH, through which we conducted the operations of MyTheresa.
 
The following condensed consolidating financial information represents the financial information of the Company and its non-guarantor subsidiaries under the Senior Secured Credit Facilities, Cash Pay Notes and PIK Toggle Notes prepared on the equity basis of accounting.  The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the non-guarantor subsidiaries operated as independent entities.

24

 
 
January 26, 2019
(in thousands)
 
Company
 
NMG
 
Guarantor Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 

 
 
 
 

 
 

 
 

 
 

Current assets:
 
 

 
 
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
—

 
$
39,471

 
$
902

 
$
965

 
$
—

 
$
41,338

Credit card receivables
 
—

 
36,462

 
—

 
—

 
—

 
36,462

Merchandise inventories
 
—

 
854,747

 
144,590

 
—

 
—

 
999,337

Other current assets
 
—

 
229,085

 
19,499

 
—

 
(588
)
 
247,996

Total current assets
 
—

 
1,159,765

 
164,991

 
965

 
(588
)
 
1,325,133

Property and equipment, net
 
—

 
1,318,201

 
133,462

 
87,614

 
—

 
1,539,277

Intangible assets, net
 
—

 
434,926

 
2,180,872

 
—

 
—

 
2,615,798

Goodwill
 
—

 
1,338,843

 
414,402

 
—

 
—

 
1,753,245

Other long-term assets
 
—

 
31,793

 
1,063

 
—

 
—

 
32,856

Investments in subsidiaries
 
412,905

 
2,857,163

 
—

 
—

 
(3,270,068
)
 
—

Total assets
 
$
412,905

 
$
7,140,691

 
$
2,894,790

 
$
88,579

 
$
(3,270,656
)
 
$
7,266,309

LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 
 
 

 
 

 
 

Accounts payable
 
$
—

 
$
252,945

 
$
—

 
$
—

 
$
—

 
$
252,945

Accrued liabilities
 
—

 
408,593

 
119,218

 
649

 
(588
)
 
527,872

Current portion of long-term debt
 
—

 
29,426

 
—

 
—

 
—

 
29,426

Total current liabilities
 
—

 
690,964

 
119,218

 
649

 
(588
)
 
810,243

Long-term liabilities:
 
 

 
 

 
 
 
 

 
 

 
 

Long-term debt, net of debt issuance costs
 
—

 
4,732,782

 
—

 
—

 
—

 
4,732,782

Deferred income taxes
 
—

 
688,764

 
—

 
—

 
—

 
688,764

Other long-term liabilities
 
—

 
615,276

 
7,339

 
(1,000
)
 
—

 
621,615

Total long-term liabilities
 
—

 
6,036,822

 
7,339

 
(1,000
)
 
—

 
6,043,161

Total member equity
 
412,905

 
412,905

 
2,768,233

 
88,930

 
(3,270,068
)
 
412,905

Total liabilities and member equity
 
$
412,905

 
$
7,140,691

 
$
2,894,790

 
$
88,579

 
$
(3,270,656
)
 
$
7,266,309



25

 
 
July 28, 2018
(in thousands)
 
Company
 
NMG
 
Guarantor Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 

 
 
 
 

 
 

 
 

 
 

Current assets:
 
 

 
 
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
—

 
$
33,121

 
$
683

 
$
4,706

 
$
—

 
$
38,510

Credit card receivables
 
—

 
30,551

 
—

 
3,138

 
—

 
33,689

Merchandise inventories
 
—

 
844,429

 
145,967

 
125,443

 
—

 
1,115,839

Other current assets
 
—

 
111,279

 
10,348

 
2,781

 
(586
)
 
123,822

Total current assets
 
—

 
1,019,380

 
156,998

 
136,068

 
(586
)
 
1,311,860

Property and equipment, net
 
—

 
1,327,509

 
138,740

 
103,655

 
—

 
1,569,904

Intangible assets, net
 
—

 
459,512

 
2,203,322

 
72,469

 
—

 
2,735,303

Goodwill
 
—

 
1,338,843

 
414,402

 
130,624

 
—

 
1,883,869

Other long-term assets
 
—

 
43,863

 
1,104

 
—

 
—

 
44,967

Investments in subsidiaries
 
759,181

 
3,194,802

 
—

 
—

 
(3,953,983
)
 
—

Total assets
 
$
759,181

 
$
7,383,909

 
$
2,914,566

 
$
442,816

 
$
(3,954,569
)
 
$
7,545,903

LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 
 
 

 
 

 
 

Accounts payable
 
$
—

 
$
281,488

 
$
—

 
$
37,481

 
$
—

 
$
318,969

Accrued liabilities
 
—

 
406,072

 
69,979

 
35,824

 
(586
)
 
511,289

Current portion of long-term debt
 
—

 
29,426

 
—

 
—

 
—

 
29,426

Total current liabilities
 
—

 
716,986

 
69,979

 
73,305

 
(586
)
 
859,684

Long-term liabilities:
 
 

 
 

 
 
 
 

 
 

 
 

Long-term debt, net of debt issuance costs
 
—

 
4,623,152

 
—

 
—

 
—

 
4,623,152

Deferred income taxes
 
—

 
694,848

 
—

 
12,706

 
—

 
707,554

Other long-term liabilities
 
—

 
589,742

 
7,390

 
(800
)
 
—

 
596,332

Total long-term liabilities
 
—

 
5,907,742

 
7,390

 
11,906

 
—

 
5,927,038

Total member equity
 
759,181

 
759,181

 
2,837,197

 
357,605

 
(3,953,983
)
 
759,181

Total liabilities and member equity
 
$
759,181

 
$
7,383,909

 
$
2,914,566

 
$
442,816

 
$
(3,954,569
)
 
$
7,545,903



26

 
 
January 27, 2018
(in thousands)
 
Company
 
NMG
 
Guarantor Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 

 
 
 
 

 
 

 
 

 
 

Current assets:
 
 

 
 
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
—

 
$
31,072

 
$
854

 
$
3,862

 
$
—

 
$
35,788

Credit card receivables
 
—

 
36,268

 
—

 
5,990

 
—

 
42,258

Merchandise inventories
 
—

 
880,056

 
143,328

 
113,794

 
—

 
1,137,178

Other current assets
 
—

 
127,745

 
10,943

 
4,914

 
(150
)
 
143,452

Total current assets
 
—

 
1,075,141

 
155,125

 
128,560

 
(150
)
 
1,358,676

Property and equipment, net
 
—

 
1,309,679

 
144,226

 
103,207

 
—

 
1,557,112

Intangible assets, net
 
—

 
484,355

 
2,226,259

 
75,427

 
—

 
2,786,041

Goodwill
 
—

 
1,338,844

 
414,402

 
134,483

 
—

 
1,887,729

Other long-term assets
 
—

 
36,074

 
1,303

 
—

 
—

 
37,377

Investments in subsidiaries
 
839,014

 
3,204,672

 
—

 
—

 
(4,043,686
)
 
—

Total assets
 
$
839,014

 
$
7,448,765

 
$
2,941,315

 
$
441,677

 
$
(4,043,836
)
 
$
7,626,935

LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
—

 
$
259,837

 
$
—

 
$
23,968

 
$
—

 
$
283,805

Accrued liabilities
 
—

 
401,227

 
90,613

 
40,391

 
(150
)
 
532,081

Current portion of long-term debt
 
—

 
29,426

 
—

 
—

 
—

 
29,426

Total current liabilities
 
—

 
690,490

 
90,613

 
64,359

 
(150
)
 
845,312

Long-term liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Long-term debt, net of debt issuance costs
 
—

 
4,569,669

 
—

 
2,593

 
—

 
4,572,262

Deferred income taxes
 
—

 
746,905

 
—

 
15,935

 
—

 
762,840

Other long-term liabilities
 
—

 
602,687

 
5,413

 
(593
)
 
—

 
607,507

Total long-term liabilities
 
—

 
5,919,261

 
5,413

 
17,935

 
—

 
5,942,609

Total member equity
 
839,014

 
839,014

 
2,845,289

 
359,383

 
(4,043,686
)
 
839,014

Total liabilities and member equity
 
$
839,014

 
$
7,448,765

 
$
2,941,315

 
$
441,677

 
$
(4,043,836
)
 
$
7,626,935


27

 
 
Thirteen weeks ended January 26, 2019
(in thousands)
 
Company
 
NMG
 
Guarantor Subsidiaries
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$
—

 
$
1,177,938

 
$
216,182

 
$
—

 
$
—

 
$
1,394,120

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
—

 
801,927

 
158,055

 
(1,435
)
 
—

 
958,547

Selling, general and administrative expenses (excluding depreciation)
 
—

 
271,391

 
37,846

 
(14
)
 
—

 
309,223

Depreciation expense
 
—

 
42,982

 
3,448

 
1,379

 
—

 
47,809

Amortization of intangible assets and favorable lease commitments
 
—

 
11,969

 
11,187

 
—

 
—

 
23,156

Other expenses (income)
 
—

 
11,895

 
—

 
—

 
—

 
11,895

Operating earnings (loss)
 
—

 
37,774

 
5,646

 
70

 
—

 
43,490

Benefit plan expense (income), net
 
—

 
872

 
—

 
—

 
—

 
872

Interest expense (income), net
 
—

 
81,434

 
—

 
—

 
—

 
81,434

Intercompany royalty charges (income)
 
—

 
60,098

 
(60,098
)
 
—

 
—

 
—

Equity in loss (earnings) of subsidiaries
 
29,006

 
(65,814
)
 
—

 
—

 
36,808

 
—

Earnings (loss) before income taxes
 
(29,006
)
 
(38,816
)
 
65,744

 
70

 
(36,808
)
 
(38,816
)
Income tax expense (benefit)
 
—

 
(9,810
)
 
—

 
—

 
—

 
(9,810
)
Net earnings (loss)
 
$
(29,006
)
 
$
(29,006
)
 
$
65,744

 
$
70

 
$
(36,808
)
 
$
(29,006
)
Total other comprehensive earnings (loss), net of tax
 
(7,290
)
 
(7,290
)
 
—

 
—

 
7,290

 
(7,290
)
Total comprehensive earnings (loss)
 
$
(36,296
)
 
$
(36,296
)
 
$
65,744

 
$
70

 
$
(29,518
)
 
$
(36,296
)

 
 
Thirteen weeks ended January 27, 2018
(in thousands)
 
Company
 
NMG
 
Guarantor Subsidiaries
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$
—

 
$
1,187,699

 
$
217,705

 
$
88,707

 
$
—

 
$
1,494,111

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
—

 
812,202

 
153,495

 
56,287

 
—

 
1,021,984

Selling, general and administrative expenses (excluding depreciation)
 
—

 
261,818

 
36,450

 
23,629

 
—

 
321,897

Depreciation expense
 
—

 
47,267

 
4,163

 
1,998

 
—

 
53,428

Amortization of intangible assets and favorable lease commitments
 
—

 
12,416

 
11,468

 
400

 
—

 
24,284

Other expenses (income)
 
—

 
12,614

 
—

 
—

 
—

 
12,614

Operating earnings (loss)
 
—

 
41,382

 
12,129

 
6,393

 
—

 
59,904

Benefit plan expense (income), net
 
—

 
462

 
—

 
—

 
—

 
462

Interest expense (income), net
 
—

 
76,622

 
—

 
(73
)
 
—

 
76,549

Intercompany royalty charges (income)
 
—

 
49,364

 
(49,364
)
 
—

 
—

 
—

Equity in loss (earnings) of subsidiaries
 
(372,532
)
 
(66,776
)
 
—

 
—

 
439,308

 
—

Earnings (loss) before income taxes
 
372,532

 
(18,290
)
 
61,493

 
6,466

 
(439,308
)
 
(17,107
)
Income tax expense (benefit)
 
—

 
(390,822
)
 
—

 
1,183

 
—

 
(389,639
)
Net earnings (loss)
 
$
372,532

 
$
372,532

 
$
61,493

 
$
5,283

 
$
(439,308
)
 
$
372,532

Total other comprehensive earnings (loss), net of tax
 
14,655

 
10,088

 
—

 
4,567

 
(14,655
)
 
14,655

Total comprehensive earnings (loss)
 
$
387,187

 
$
382,620

 
$
61,493

 
$
9,850

 
$
(453,963
)
 
$
387,187








28

 
 
Twenty-six weeks ended January 26, 2019
(in thousands)
 
Company
 
NMG
 
Guarantor Subsidiaries
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$
—

 
$
2,037,124

 
$
401,324

 
$
60,063

 
$
—

 
$
2,498,511

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
—

 
1,342,151

 
275,322

 
41,310

 
—

 
1,658,783

Selling, general and administrative expenses (excluding depreciation)
 
—

 
496,294

 
72,910

 
16,780

 
—

 
585,984

Depreciation expense
 
—

 
88,072

 
7,319

 
3,112

 
—

 
98,503

Amortization of intangible assets and favorable lease commitments
 
—

 
24,247

 
22,450

 
243

 
—

 
46,940

Other expenses (income)
 
—

 
21,324

 
—

 
—

 
—

 
21,324

Operating earnings (loss)
 
—

 
65,036

 
23,323

 
(1,382
)
 
—

 
86,977

Benefit plan expense (income), net
 
—

 
1,745

 
—

 
—

 
—

 
1,745

Interest expense, net
 
—

 
161,975

 
—

 
8

 
—

 
161,983

Intercompany royalty charges (income)
 
—

 
109,049

 
(109,049
)
 
—

 
—

 
—

Equity in loss (earnings) of subsidiaries
 
57,177

 
(131,868
)
 
—

 
—

 
74,691

 
—

Earnings (loss) before income taxes
 
(57,177
)
 
(75,865
)
 
132,372

 
(1,390
)
 
(74,691
)
 
(76,751
)
Income tax expense (benefit)
 
—

 
(18,688
)
 
—

 
(886
)
 
—

 
(19,574
)
Net earnings (loss)
 
$
(57,177
)
 
$
(57,177
)
 
$
132,372

 
$
(504
)
 
$
(74,691
)
 
$
(57,177
)
Total other comprehensive earnings (loss), net of tax
 
(23,371
)
 
(21,869
)
 
—

 
(1,502
)
 
23,371

 
(23,371
)
Total comprehensive earnings (loss)
 
$
(80,548
)
 
$
(79,046
)
 
$
132,372

 
$
(2,006
)
 
$
(51,320
)
 
$
(80,548
)

 
 
Twenty-six weeks ended January 27, 2018
(in thousands)
 
Company
 
NMG
 
Guarantor Subsidiaries
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$
—

 
$
2,025,652

 
$
413,204

 
$
162,801

 
$
—

 
$
2,601,657

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
—

 
1,341,427

 
275,169

 
103,658

 
—

 
1,720,254

Selling, general and administrative expenses (excluding depreciation)
 
—

 
498,420

 
71,773

 
46,521

 
—

 
616,714

Depreciation expense
 
—

 
96,526

 
8,155

 
3,975

 
—

 
108,656

Amortization of intangible assets and favorable lease commitments
 
—

 
25,401

 
23,032

 
800

 
—

 
49,233

Other expenses (income)
 
—

 
15,454

 
—

 
—

 
—

 
15,454

Operating earnings (loss)
 
—

 
48,424

 
35,075

 
7,847

 
—

 
91,346

Benefit plan expense (income), net
 
—

 
925

 
—

 
—

 
—

 
925

Interest expense, net
 
—

 
152,752

 
—

 
(105
)
 
—

 
152,647

Intercompany royalty charges (income)
 
—

 
88,797

 
(88,797
)
 
—

 
—

 
—

Equity in loss (earnings) of subsidiaries
 
(346,315
)
 
(131,061
)
 
—

 
—

 
477,376

 
—

Earnings (loss) before income taxes
 
346,315

 
(62,989
)
 
123,872

 
7,952

 
(477,376
)
 
(62,226
)
Income tax expense (benefit)
 
—

 
(409,304
)
 
—

 
763

 
—

 
(408,541
)
Net earnings (loss)
 
$
346,315

 
$
346,315

 
$
123,872

 
$
7,189

 
$
(477,376
)
 
$
346,315

Total other comprehensive earnings (loss), net of tax
 
25,052

 
14,331

 
—

 
10,721

 
(25,052
)
 
25,052

Total comprehensive earnings (loss)
 
$
371,367

 
$
360,646

 
$
123,872

 
$
17,910

 
$
(502,428
)
 
$
371,367




29

 
 
Twenty-six weeks ended January 26, 2019
(in thousands)
 
Company
 
NMG
 
Guarantor Subsidiaries
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
CASH FLOWS - OPERATING ACTIVITIES
 
 

 
 
 
 

 
 

 
 

 
 

Net earnings (loss)
 
$
(57,177
)
 
$
(57,177
)
 
$
132,372

 
$
(504
)
 
$
(74,691
)
 
$
(57,177
)
Adjustments to reconcile net earnings (loss) to net cash provided by (used for) operating activities:
 
 

 
 

 
 

 
 

 
 

 
 

Depreciation and amortization expense
 
—

 
124,561

 
29,769

 
3,355

 
—

 
157,685

Deferred income taxes
 
—

 
(1,338
)
 
—

 
(433
)
 
—

 
(1,771
)
Other
 
—

 
2,300

 
(10
)
 
131

 
—

 
2,421

Intercompany royalty income payable (receivable)
 
—

 
109,049

 
(109,049
)
 
—

 
—

 
—

Equity in loss (earnings) of subsidiaries
 
57,177

 
(131,868
)
 
—

 
—

 
74,691

 
—

Changes in operating assets and liabilities, net
 
—

 
(54,233
)
 
(51,109
)
 
(21,063
)
 
—

 
(126,405
)
Net cash provided by (used for) operating activities
 
—

 
(8,706
)
 
1,973

 
(18,514
)
 
—

 
(25,247
)
CASH FLOWS - INVESTING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

 
 

Capital expenditures
 
—

 
(81,527
)
 
(1,754
)
 
(785
)
 
—

 
(84,066
)
Net cash provided by (used for) investing activities
 
—

 
(81,527
)
 
(1,754
)
 
(785
)
 
—

 
(84,066
)
CASH FLOWS - FINANCING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

 
 

Borrowings under revolving credit facilities
 
—

 
944,000

 
—

 
18,970

 
—

 
962,970

Repayment of borrowings
 
—

 
(845,713
)
 
—

 
(1,223
)
 
—

 
(846,936
)
Distribution to Parent
 
—

 
—

 
—

 
(2,181
)
 
—

 
(2,181
)
Repurchase of stock
 
—

 
(1,401
)
 
—

 
—

 
—

 
(1,401
)
Shares withheld for remittance of employee taxes
 
—

 
(303
)
 
—

 
—

 
—

 
(303
)
Net cash provided by (used for) financing activities
 
—

 
96,583

 
—

 
15,566

 
—

 
112,149

Effect of exchange rate changes on cash and cash equivalents
 
—

 
—

 
—

 
(8
)
 
—

 
(8
)
CASH AND CASH EQUIVALENTS
 
 

 
 

 
 

 
 

 
 

 
 

Increase (decrease) during the period
 
—

 
6,350

 
219

 
(3,741
)
 
—

 
2,828

Beginning balance
 
—

 
33,121

 
683

 
4,706

 
—

 
38,510

Ending balance
 
$
—

 
$
39,471

 
$
902

 
$
965

 
$
—

 
$
41,338



30

 
 
Twenty-six weeks ended January 27, 2018
(in thousands)
 
Company
 
NMG
 
Guarantor Subsidiaries
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
CASH FLOWS - OPERATING ACTIVITIES
 
 

 
 
 
 

 
 

 
 

 
 

Net earnings (loss)
 
$
346,315

 
$
346,315

 
$
123,872

 
$
7,189

 
$
(477,376
)
 
$
346,315

Adjustments to reconcile net earnings (loss) to net cash provided by (used for) operating activities:
 
 

 
 

 
 

 
 

 
 

 
 

Depreciation and amortization expense
 
—

 
134,165

 
31,187

 
4,775

 
—

 
170,127

Deferred income taxes
 
—

 
(402,691
)
 
—

 
(290
)
 
—

 
(402,981
)
Payment-in-kind interest
 
—

 
29,289

 
—

 
—

 
—

 
29,289

Other
 
—

 
1,595

 
420

 
(2,821
)
 
—

 
(806
)
Intercompany royalty income payable (receivable)
 
—

 
88,797

 
(88,797
)
 
—

 
—

 
—

Equity in loss (earnings) of subsidiaries
 
(346,315
)
 
(131,061
)
 
—

 
—

 
477,376

 
—

Changes in operating assets and liabilities, net
 
—

 
142,090

 
(63,245
)
 
(25,245
)
 
—

 
53,600

Net cash provided by (used for) operating activities
 
—

 
208,499

 
3,437

 
(16,392
)
 
—

 
195,544

CASH FLOWS - INVESTING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

 
 

Capital expenditures
 
—

 
(59,417
)
 
(3,232
)
 
(3,147
)
 
—

 
(65,796
)
Net cash provided by (used for) investing activities
 
—

 
(59,417
)
 
(3,232
)
 
(3,147
)
 
—

 
(65,796
)
CASH FLOWS - FINANCING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

 
 

Borrowings under revolving credit facilities
 
—

 
432,000

 
—

 
18,163

 
—

 
450,163

Repayment of borrowings
 
—

 
(577,713
)
 
—

 
(15,569
)
 
—

 
(593,282
)
Repurchase of stock
 
—

 
(266
)
 
—

 
—

 
—

 
(266
)
Shares withheld for remittance of employee taxes
 
—

 
(332
)
 
—

 
—

 
—

 
(332
)
Net cash provided (used for) by financing activities
 
—

 
(146,311
)
 
—

 
2,594

 
—

 
(143,717
)
Effect of exchange rate changes on cash and cash equivalents
 
—

 
—

 
—

 
518

 
—

 
518

CASH AND CASH EQUIVALENTS
 
 

 
 

 
 

 
 

 
 

 
 

Increase (decrease) during the period
 
—

 
2,771

 
205

 
(16,427
)
 
—

 
(13,451
)
Beginning balance
 
—

 
28,301

 
649

 
20,289

 
—

 
49,239

Ending balance
 
$
—

 
$
31,072

 
$
854

 
$
3,862

 
$
—

 
$
35,788




31

Results of Operations and Financial Condition of Unrestricted Subsidiaries. On March 10, 2017, the Board of Directors of Parent designated certain of our subsidiaries as "unrestricted subsidiaries" for purposes of the indenture governing the Cash Pay Notes and the indenture governing the PIK Toggle Notes. These subsidiaries were previously or simultaneously designated as "unrestricted subsidiaries" under the Asset-Based Revolving Credit Facility and the Senior Secured Term Loan Facility and consist of (i) the entities through which we conducted the operations of MyTheresa prior to its distribution to Parent in September 2018 and (ii) Nancy Holdings LLC, which holds legal title to certain real property located in McLean, Virginia, San Antonio, Texas and Longview, Texas used by us in conducting our operations.

Pursuant to the terms of the indentures governing the Cash Pay Notes and the PIK Toggle Notes, we are presenting the following financial information with respect to the unrestricted subsidiaries separate from the Company and its restricted subsidiaries. The difference in net earnings (loss) of the unrestricted subsidiaries compared to the net earnings (loss) of the non-guarantor subsidiaries, as presented in the tables above in this Note 14, consisted primarily of a net interest income of approximately $1.5 million per fiscal quarter associated with an intercompany note payable by the MyTheresa unrestricted subsidiaries and, prior to the Distribution, held by NMG International LLC, which is a non-guarantor restricted subsidiary.

This information may not necessarily be indicative of the financial condition and results of operations of the unrestricted subsidiaries had they operated as independent entities during the periods presented.

(in thousands)
January 26, 2019
 
July 28, 2018
 
January 27, 2018
 
 
 
 
 
 
Total assets
$
88,510

 
$
442,748

 
$
441,609

Net assets
88,861

 
146,300

 
151,079


 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
January 26, 2019
 
January 27, 2018
 
January 26, 2019
 
January 27, 2018
 
 
 
 
 
 
 
 
Revenues
$
—

 
$
88,707

 
$
60,063

 
$
162,801

Net earnings (loss)
56

 
3,758

 
(2,636
)
 
4,139



32

15. Condensed Consolidating Financial Information (with respect to NMG's obligations under the 2028 Debentures)
 
All of NMG’s obligations under the 2028 Debentures are guaranteed by the Company.  The guarantee by the Company is full and unconditional and is subject to automatic release if the requirements for legal defeasance or covenant defeasance of the 2028 Debentures are satisfied, or if NMG’s obligations under the indenture governing the 2028 Debentures are discharged. The 2028 Debentures are not guaranteed by any of NMG's subsidiaries. At January 26, 2019, NMG's subsidiaries consisted principally of (i) Bergdorf Goodman, Inc., through which we conduct the operations of our Bergdorf Goodman brand, (ii) NM Nevada Trust, which holds legal title to certain real property and intangible assets used by NMG in conducting its operations and (iii) Nancy Holdings LLC, which holds legal title to certain real property used by NMG in conducting its operations and described in Note 14 under "— Results of Operations and Financial Condition of Unrestricted Subsidiaries". Prior to the Distribution in September 2018, NMG's subsidiaries also included NMG Germany GmbH, through which we conducted the operations of MyTheresa, and which was not a guarantor of the 2028 Debentures.
 
The following condensed consolidating financial information represents the financial information of the Company and its non-guarantor subsidiaries under the 2028 Debentures, prepared on the equity basis of accounting.  The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the non-guarantor subsidiaries operated as independent entities.
 
 
January 26, 2019
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 

 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
—

 
$
39,471

 
$
1,867

 
$
—

 
$
41,338

Credit card receivables
 
—

 
36,462

 
—

 
—

 
36,462

Merchandise inventories
 
—

 
854,747

 
144,590

 
—

 
999,337

Other current assets
 
—

 
229,085

 
19,499

 
(588
)
 
247,996

Total current assets
 
—

 
1,159,765

 
165,956

 
(588
)
 
1,325,133

Property and equipment, net
 
—

 
1,318,201

 
221,076

 
—

 
1,539,277

Intangible assets, net
 
—

 
434,926

 
2,180,872

 
—

 
2,615,798

Goodwill
 
—

 
1,338,843

 
414,402

 
—

 
1,753,245

Other long-term assets
 
—

 
31,793

 
1,063

 
—

 
32,856

Investments in subsidiaries
 
412,905

 
2,857,163

 
—

 
(3,270,068
)
 
—

Total assets
 
$
412,905

 
$
7,140,691

 
$
2,983,369

 
$
(3,270,656
)
 
$
7,266,309

LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
—

 
$
252,945

 
$
—

 
$
—

 
$
252,945

Accrued liabilities
 
—

 
408,593

 
119,867

 
(588
)
 
527,872

Current portion of long-term debt
 
—

 
29,426

 
—

 
—

 
29,426

Total current liabilities
 
—

 
690,964

 
119,867

 
(588
)
 
810,243

Long-term liabilities:
 
 

 
 

 
 

 
 

 
 

Long-term debt, net of debt issuance costs
 
—

 
4,732,782

 
—

 
—

 
4,732,782

Deferred income taxes
 
—

 
688,764

 
—

 
—

 
688,764

Other long-term liabilities
 
—

 
615,276

 
6,339

 
—

 
621,615

Total long-term liabilities
 
—

 
6,036,822

 
6,339

 
—

 
6,043,161

Total member equity
 
412,905

 
412,905

 
2,857,163

 
(3,270,068
)
 
412,905

Total liabilities and member equity
 
$
412,905

 
$
7,140,691

 
$
2,983,369

 
$
(3,270,656
)
 
$
7,266,309


33

 
 
July 28, 2018
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 

 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
—

 
$
33,121

 
$
5,389

 
$
—

 
$
38,510

Credit card receivables
 
—

 
30,551

 
3,138

 
—

 
33,689

Merchandise inventories
 
—

 
844,429

 
271,410

 
—

 
1,115,839

Other current assets
 
—

 
111,279

 
13,129

 
(586
)
 
123,822

Total current assets
 
—

 
1,019,380

 
293,066

 
(586
)
 
1,311,860

Property and equipment, net
 
—

 
1,327,509

 
242,395

 
—

 
1,569,904

Intangible assets, net
 
—

 
459,512

 
2,275,791

 
—

 
2,735,303

Goodwill
 
—

 
1,338,843

 
545,026

 
—

 
1,883,869

Other long-term assets
 
—

 
43,863

 
1,104

 
—

 
44,967

Investments in subsidiaries
 
759,181

 
3,194,802

 
—

 
(3,953,983
)
 
—

Total assets
 
$
759,181

 
$
7,383,909

 
$
3,357,382

 
$
(3,954,569
)
 
$
7,545,903

LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
—

 
$
281,488

 
$
37,481

 
$
—

 
$
318,969

Accrued liabilities
 
—

 
406,072

 
105,803

 
(586
)
 
511,289

Current portion of long-term debt
 
—

 
29,426

 
—

 
—

 
29,426

Total current liabilities
 
—

 
716,986

 
143,284

 
(586
)
 
859,684

Long-term liabilities:
 
 

 
 

 
 

 
 

 
 

Long-term debt, net of debt issuance costs
 
—

 
4,623,152

 
—

 
—

 
4,623,152

Deferred income taxes
 
—

 
694,848

 
12,706

 
—

 
707,554

Other long-term liabilities
 
—

 
589,742

 
6,590

 
—

 
596,332

Total long-term liabilities
 
—

 
5,907,742

 
19,296

 
—

 
5,927,038

Total member equity
 
759,181

 
759,181

 
3,194,802

 
(3,953,983
)
 
759,181

Total liabilities and member equity
 
$
759,181

 
$
7,383,909

 
$
3,357,382

 
$
(3,954,569
)
 
$
7,545,903


34

 
 
January 27, 2018
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 

 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
—

 
$
31,072

 
$
4,716

 
$
—

 
$
35,788

Credit card receivables
 
—

 
36,268

 
5,990

 
—

 
42,258

Merchandise inventories
 
—

 
880,056

 
257,122

 
—

 
1,137,178

Other current assets
 
—

 
127,745

 
15,857

 
(150
)
 
143,452

Total current assets
 
—

 
1,075,141

 
283,685

 
(150
)
 
1,358,676

Property and equipment, net
 
—

 
1,309,679

 
247,433

 
—

 
1,557,112

Intangible assets, net
 
—

 
484,355

 
2,301,686

 
—

 
2,786,041

Goodwill
 
—

 
1,338,844

 
548,885

 
—

 
1,887,729

Other long-term assets
 
—

 
36,074

 
1,303

 
—

 
37,377

Investments in subsidiaries
 
839,014

 
3,204,672

 
—

 
(4,043,686
)
 
—

Total assets
 
$
839,014

 
$
7,448,765

 
$
3,382,992

 
$
(4,043,836
)
 
$
7,626,935

LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
—

 
$
259,837

 
$
23,968

 
$
—

 
$
283,805

Accrued liabilities
 
—

 
401,227

 
131,004

 
(150
)
 
532,081

Current portion of long-term debt
 
—

 
29,426

 
—

 
—

 
29,426

Total current liabilities
 
—

 
690,490

 
154,972

 
(150
)
 
845,312

Long-term liabilities:
 
 

 
 

 
 

 
 

 
 

Long-term debt, net of debt issuance costs
 
—

 
4,569,669

 
2,593

 
—

 
4,572,262

Deferred income taxes
 
—

 
746,905

 
15,935

 
—

 
762,840

Other long-term liabilities
 
—

 
602,687

 
4,820

 
—

 
607,507

Total long-term liabilities
 
—

 
5,919,261

 
23,348

 
—

 
5,942,609

Total member equity
 
839,014

 
839,014

 
3,204,672

 
(4,043,686
)
 
839,014

Total liabilities and member equity
 
$
839,014

 
$
7,448,765

 
$
3,382,992

 
$
(4,043,836
)
 
$
7,626,935


35

 
 
Thirteen weeks ended January 26, 2019
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$
—

 
$
1,177,938

 
$
216,182

 
$
—

 
$
1,394,120

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
—

 
801,927

 
156,620

 
—

 
958,547

Selling, general and administrative expenses (excluding depreciation)
 
—

 
271,391

 
37,832

 
—

 
309,223

Depreciation expense
 
—

 
42,982

 
4,827

 
—

 
47,809

Amortization of intangible assets and favorable lease commitments
 
—

 
11,969

 
11,187

 
—

 
23,156

Other expenses (income)
 
—

 
11,895

 
—

 
—

 
11,895

Operating earnings (loss)
 
—

 
37,774

 
5,716

 
—

 
43,490

Benefit plan expense (income), net
 
—

 
872

 
—

 
—

 
872

Interest expense (income), net
 
—

 
81,434

 
—

 
—

 
81,434

Intercompany royalty charges (income)
 
—

 
60,098

 
(60,098
)
 
—

 
—

Equity in loss (earnings) of subsidiaries
 
29,006

 
(65,814
)
 
—

 
36,808

 
—

Earnings (loss) before income taxes
 
(29,006
)
 
(38,816
)
 
65,814

 
(36,808
)
 
(38,816
)
Income tax expense (benefit)
 
—

 
(9,810
)
 
—

 
—

 
(9,810
)
Net earnings (loss)
 
$
(29,006
)
 
$
(29,006
)
 
$
65,814

 
$
(36,808
)
 
$
(29,006
)
Total other comprehensive earnings (loss), net of tax
 
(7,290
)
 
(7,290
)
 
—

 
7,290

 
(7,290
)
Total comprehensive earnings (loss)
 
$
(36,296
)
 
$
(36,296
)
 
$
65,814

 
$
(29,518
)
 
$
(36,296
)

 
 
Thirteen weeks ended January 27, 2018
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$
—

 
$
1,187,699

 
$
306,412

 
$
—

 
$
1,494,111

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
—

 
812,202

 
209,782

 
—

 
1,021,984

Selling, general and administrative expenses (excluding depreciation)
 
—

 
261,818

 
60,079

 
—

 
321,897

Depreciation expense
 
—

 
47,267

 
6,161

 
—

 
53,428

Amortization of intangible assets and favorable lease commitments
 
—

 
12,416

 
11,868

 
—

 
24,284

Other expenses (income)
 
—

 
12,614

 
—

 
—

 
12,614

Operating earnings (loss)
 
—

 
41,382

 
18,522

 
—

 
59,904

Benefit plan expense (income), net
 
—

 
462

 
—

 
—

 
462

Interest expense (income), net
 
—

 
76,622

 
(73
)
 
—

 
76,549

Intercompany royalty charges (income)
 
—

 
49,364

 
(49,364
)
 
—

 
—

Equity in loss (earnings) of subsidiaries
 
(372,532
)
 
(66,776
)
 
—

 
439,308

 
—

Earnings (loss) before income taxes
 
372,532

 
(18,290
)
 
67,959

 
(439,308
)
 
(17,107
)
Income tax expense (benefit)
 
—

 
(390,822
)
 
1,183

 
—

 
(389,639
)
Net earnings (loss)
 
$
372,532

 
$
372,532

 
$
66,776

 
$
(439,308
)
 
$
372,532

Total other comprehensive earnings (loss), net of tax
 
14,655

 
10,088

 
4,567

 
(14,655
)
 
14,655

Total comprehensive earnings (loss)
 
$
387,187

 
$
382,620

 
$
71,343

 
$
(453,963
)
 
$
387,187



36

 
 
Twenty-six weeks ended January 26, 2019
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$
—

 
$
2,037,124

 
$
461,387

 
$
—

 
$
2,498,511

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
—

 
1,342,151

 
316,632

 
—

 
1,658,783

Selling, general and administrative expenses (excluding depreciation)
 
—

 
496,294

 
89,690

 
—

 
585,984

Depreciation expense
 
—

 
88,072

 
10,431

 
—

 
98,503

Amortization of intangible assets and favorable lease commitments
 
—

 
24,247

 
22,693

 
—

 
46,940

Other expenses (income)
 
—

 
21,324

 
—

 
—

 
21,324

Operating earnings (loss)
 
—

 
65,036

 
21,941

 
—

 
86,977

Benefit plan expense (income), net
 
—

 
1,745

 
—

 
—

 
1,745

Interest expense, net
 
—

 
161,975

 
8

 
—

 
161,983

Intercompany royalty charges (income)
 
—

 
109,049

 
(109,049
)
 
—

 
—

Equity in loss (earnings) of subsidiaries
 
57,177

 
(131,868
)
 
—

 
74,691

 
—

Earnings (loss) before income taxes
 
(57,177
)
 
(75,865
)
 
130,982

 
(74,691
)
 
(76,751
)
Income tax expense (benefit)
 
—

 
(18,688
)
 
(886
)
 
—

 
(19,574
)
Net earnings (loss)
 
$
(57,177
)
 
$
(57,177
)
 
$
131,868

 
$
(74,691
)
 
$
(57,177
)
Total other comprehensive earnings (loss), net of tax
 
(23,371
)
 
(21,869
)
 
(1,502
)
 
23,371

 
(23,371
)
Total comprehensive earnings (loss)
 
$
(80,548
)
 
$
(79,046
)
 
$
130,366

 
$
(51,320
)
 
$
(80,548
)

 
 
Twenty-six weeks ended January 27, 2018
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$
—

 
$
2,025,652

 
$
576,005

 
$
—

 
$
2,601,657

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
—

 
1,341,427

 
378,827

 
—

 
1,720,254

Selling, general and administrative expenses (excluding depreciation)
 
—

 
498,420

 
118,294

 
—

 
616,714

Depreciation expense
 
—

 
96,526

 
12,130

 
—

 
108,656

Amortization of intangible assets and favorable lease commitments
 
—

 
25,401

 
23,832

 
—

 
49,233

Other expenses (income)
 
—

 
15,454

 
—

 
—

 
15,454

Operating earnings (loss)
 
—

 
48,424

 
42,922

 
—

 
91,346

Benefit plan expense (income), net
 
—

 
925

 
—

 
—

 
925

Interest expense, net
 
—

 
152,752

 
(105
)
 
—

 
152,647

Intercompany royalty charges (income)
 
—

 
88,797

 
(88,797
)
 
—

 
—

Equity in loss (earnings) of subsidiaries
 
(346,315
)
 
(131,061
)
 
—

 
477,376

 
—

Earnings (loss) before income taxes
 
346,315

 
(62,989
)
 
131,824

 
(477,376
)
 
(62,226
)
Income tax expense (benefit)
 
—

 
(409,304
)
 
763

 
—

 
(408,541
)
Net earnings (loss)
 
$
346,315

 
$
346,315

 
$
131,061

 
$
(477,376
)
 
$
346,315

Total other comprehensive earnings (loss), net of tax
 
25,052

 
14,331

 
10,721

 
(25,052
)
 
25,052

Total comprehensive earnings (loss)
 
$
371,367

 
$
360,646

 
$
141,782

 
$
(502,428
)
 
$
371,367








37

 
 
Twenty-six weeks ended January 26, 2019
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
CASH FLOWS—OPERATING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

Net earnings (loss)
 
$
(57,177
)
 
$
(57,177
)
 
$
131,868

 
$
(74,691
)
 
$
(57,177
)
Adjustments to reconcile net earnings (loss) to net cash provided by (used for) operating activities:
 
 

 
 

 
 

 
 

 
 

Depreciation and amortization expense
 
—

 
124,561

 
33,124

 
—

 
157,685

Deferred income taxes
 


 
(1,338
)
 
(433
)
 


 
(1,771
)
Other
 
—

 
2,300

 
121

 
—

 
2,421

Intercompany royalty income payable (receivable)
 
—

 
109,049

 
(109,049
)
 
—

 
—

Equity in loss (earnings) of subsidiaries
 
57,177

 
(131,868
)
 
—

 
74,691

 
—

Changes in operating assets and liabilities, net
 
—

 
(54,233
)
 
(72,172
)
 
—

 
(126,405
)
Net cash provided by (used for) operating activities
 
—

 
(8,706
)
 
(16,541
)
 
—

 
(25,247
)
CASH FLOWS—INVESTING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

Capital expenditures
 
—

 
(81,527
)
 
(2,539
)
 
—

 
(84,066
)
Net cash provided by (used for) investing activities
 
—

 
(81,527
)
 
(2,539
)
 
—

 
(84,066
)
CASH FLOWS—FINANCING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

Borrowings under revolving credit facilities
 
—

 
944,000

 
18,970

 
—

 
962,970

Repayment of borrowings
 
—

 
(845,713
)
 
(1,223
)
 
—

 
(846,936
)
Distribution to Parent
 
—

 
—

 
(2,181
)
 
—

 
(2,181
)
Repurchase of stock
 
—

 
(1,401
)
 
—

 
—

 
(1,401
)
Shares withheld for remittance of employee taxes
 
—

 
(303
)
 
—

 
—

 
(303
)
Net cash provided by (used for) financing activities
 
—

 
96,583

 
15,566

 
—

 
112,149

Effect of exchange rate changes on cash and cash equivalents
 
—

 
—

 
(8
)
 
—

 
(8
)
CASH AND CASH EQUIVALENTS
 
 

 
 

 
 

 
 

 
 

Increase (decrease) during the period
 
—

 
6,350

 
(3,522
)
 
—

 
2,828

Beginning balance
 
—

 
33,121

 
5,389

 
—

 
38,510

Ending balance
 
$
—

 
$
39,471

 
$
1,867

 
$
—

 
$
41,338



38

 
 
Twenty-six weeks ended January 27, 2018
(in thousands)
 
Company
 
NMG
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
CASH FLOWS—OPERATING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

Net earnings (loss)
 
$
346,315

 
$
346,315

 
$
131,061

 
$
(477,376
)
 
$
346,315

Adjustments to reconcile net earnings (loss) to net cash provided by (used for) operating activities:
 
 

 
 

 
 

 
 

 
 

Depreciation and amortization expense
 


 
134,165

 
35,962

 


 
170,127

Deferred income taxes
 


 
(402,691
)
 
(290
)
 


 
(402,981
)
Payment-in-kind interest
 


 
29,289

 
—

 


 
29,289

Other
 
—

 
1,595

 
(2,401
)
 
—

 
(806
)
Intercompany royalty income payable (receivable)
 
—

 
88,797

 
(88,797
)
 
—

 
—

Equity in loss (earnings) of subsidiaries
 
(346,315
)
 
(131,061
)
 
—

 
477,376

 
—

Changes in operating assets and liabilities, net
 
—

 
142,090

 
(88,490
)
 
—

 
53,600

Net cash provided by (used for) operating activities
 
—

 
208,499

 
(12,955
)
 
—

 
195,544

CASH FLOWS—INVESTING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

Capital expenditures
 
—

 
(59,417
)
 
(6,379
)
 


 
(65,796
)
Net cash provided by (used for) investing activities
 
—

 
(59,417
)
 
(6,379
)
 
—

 
(65,796
)
CASH FLOWS—FINANCING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

Borrowings under revolving credit facilities
 


 
432,000

 
18,163

 
—

 
450,163

Repayment of borrowings
 
—

 
(577,713
)
 
(15,569
)
 
—

 
(593,282
)
Repurchase of stock
 
—

 
(266
)
 
—

 
—

 
(266
)
Shares withheld for remittance of employee taxes
 
—

 
(332
)
 
—

 
—

 
(332
)
Net cash provided by (used for) financing activities
 
—

 
(146,311
)
 
2,594

 
—

 
(143,717
)
Effect of exchange rate changes on cash and cash equivalents
 
—

 
—

 
518

 
—

 
518

CASH AND CASH EQUIVALENTS
 
 

 
 

 
 

 
 

 
 

Increase (decrease) during the period
 
—

 
2,771

 
(16,222
)
 
—

 
(13,451
)
Beginning balance
 
—

 
28,301

 
20,938

 
—

 
49,239

Ending balance
 
$
—

 
$
31,072

 
$
4,716

 
$
—

 
$
35,788





39

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.  Unless otherwise specified, the meanings of all defined terms in Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are consistent with the meanings of such terms as defined in the Notes to Condensed Consolidated Financial Statements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. In many cases, forward-looking statements can generally be identified by the use of forward-looking terminology such as "may," "plan," "predict," "expect," "estimate," "intend," "would," "will," "could," "should," "anticipate," "believe," "project" or "continue" or the negative thereof or other similar expressions.

The forward-looking statements contained in this Quarterly Report on Form 10-Q reflect our views as of the date of this Quarterly Report on Form 10-Q and are based on our expectations and beliefs concerning future events, as well as currently available data as of the date of this Quarterly Report on Form 10-Q. While we believe there is a reasonable basis for our forward-looking statements, they involve a number of risks, uncertainties, assumptions and changes in circumstances that may cause our actual results, performance or achievements to differ significantly from those expressed or implied in any forward-looking statement. Therefore, these statements are not guarantees of future events, results, performance or achievements and you should not rely on them. A variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in our forward-looking statements. Factors that could cause our actual results to differ from our expectations include, but are not limited to:

•
our ability to maintain a relevant, enjoyable and reliable omni-channel experience and to anticipate and meet our customers' evolving shopping preferences, the failure of which could adversely affect our financial performance and brand image;
•
the highly competitive nature of the luxury retail industry;
•
economic conditions that negatively impact consumer spending and demand for our merchandise;
•
our ability to anticipate, identify and respond effectively to changing fashion trends and to accurately forecast merchandise demand, the failure of which could adversely affect our business, financial condition and results of operations;
•
our ability to anticipate, identify and address risks related to the complexity of our omni‑channel plans, the failure of which could adversely affect our revenues or margins as well as damage our reputation, brands and competitive position;
•
the success of our advertising and marketing programs;
•
costs associated with our expansion and growth strategies, which could adversely affect our performance and results of operations;
•
our ability to drive customer traffic to our retail stores, including through new types of product and service offerings, and the success of the expansion, growth and remodel of our retail stores, which are subject to numerous risks, some of which are beyond our control;
•
the significance of the portion of our revenues from our stores in four states, which exposes us to economic circumstances and catastrophic occurrences unique to those states, such as the impact of fluctuations in the global price of crude oil in our Texas markets;
•
our dependence on our relationships with certain designers, brand partners and other sources of merchandise as they relate to, among other things: (i) the manner in which goods are available to us, (ii) the levels of merchandise made available to us and (iii) the pricing and payment terms with respect to our purchases;
•
a material disruption in our information systems, delays or difficulties in implementing or integrating new systems or enhancing or expanding current systems, or our failure to achieve the anticipated benefits of any new or updated information systems, which could adversely affect our business or results of operations;
•
our dependence on positive perceptions of our company, which, if eroded, could adversely affect our customer, employee and brand partner relationships;
•
our ability to meet data protection requirements and prevent or identify a breach in information privacy in a timely manner, which could negatively impact our operations;

40

•
inflation and foreign currency fluctuations, primarily fluctuations in the U.S. dollar against the Euro and British pound, which could adversely affect our results of operations;
•
our failure to comply with, or developments in, laws, rules or regulations, which could affect our business or results of operations;
•
the loss of, or disruption in, one or more of our distribution facilities, which could adversely affect our business and operations;
•
the outcome of discussions with an ad hoc committee of holders (the "Noteholders") of a majority of the Cash Pay Notes and PIK Toggle Notes (together, the "Notes") and an ad hoc committee of holders (the "Term Lenders") of a majority of outstanding term loans (the "Term Loans") under the Senior Secured Term Loan Facility regarding one or more transactions to extend the maturities of such indebtedness and the successful execution of such transactions;
•
our substantial indebtedness, which could adversely affect our business, financial condition, results of operations, credit ratings and ability to obtain additional debt financing, and our ability to fulfill our obligations with respect to such indebtedness;
•
the restrictions in our debt agreements that may limit our flexibility in operating our business and our ability to pursue future strategic investments and initiatives; and
•
other risks, uncertainties and factors set forth in Part II – Item 1A "Risk Factors" in this report or in Part I - Item 1A "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018 as filed with the Securities and Exchange Commission on September 18, 2018.

The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. Each of the forward-looking statements contained in this Quarterly Report on Form 10-Q speaks only as of the date of this Quarterly Report on Form 10-Q. Except to the extent required by law, we undertake no obligation to update or revise (publicly or otherwise) any forward-looking statements to reflect subsequent events, new information or future circumstances.
 
Overview
 
Neiman Marcus Group LTD LLC (the "Company") is a luxury omni-channel retailer conducting store and online operations principally under the Neiman Marcus, Bergdorf Goodman and Last Call brand names. References to "we," "our" and "us" are used to refer to the Company or collectively to the Company and its subsidiaries, as appropriate to the context.

The Company is a subsidiary of Mariposa Intermediate Holdings LLC ("Holdings"), which in turn is a subsidiary of Neiman Marcus Group, Inc., a Delaware corporation ("Parent"). Parent is owned by entities affiliated with Ares Management, L.P. and Canada Pension Plan Investment Board (together, the "Sponsors") and certain co-investors. The Sponsors acquired the Company on October 25, 2013 (the "Acquisition"). The Company's operations are conducted through its direct wholly owned subsidiary, The Neiman Marcus Group LLC ("NMG").

In October 2014, we acquired MyTheresa, a luxury retailer headquartered in Munich, Germany. The operations of MyTheresa are conducted primarily through the mytheresa.com website. In September 2018, substantially all of the holdings of NMG International LLC were distributed to NMG, to the Company, to Holdings and, ultimately, to Parent (the "Distribution"). These holdings consisted principally of the entities through which we had conducted the operations of MyTheresa. As a result of the Distribution, MyTheresa is no longer a subsidiary of the Company but rather a subsidiary of our Parent. Subsequent to the Distribution, the assets, liabilities and operating results of MyTheresa are excluded from our Condensed Consolidated Financial Statements. The assets and liabilities of MyTheresa are excluded from the Condensed Consolidated Balance Sheet presented as of January 26, 2019 and included in the Condensed Consolidated Balance Sheets presented as of July 28, 2018 and January 27, 2018. Our Condensed Consolidated Statements of Operations exclude the operating results of MyTheresa for the second quarter of fiscal year 2019 and include the operating results of MyTheresa for only the two months prior to the Distribution in year-to-date fiscal 2019. As it relates to the second quarter of fiscal year 2018 and year-to-date fiscal 2018, the operating results of MyTheresa are included for all periods presented.

We conduct our specialty retail store and online operations on an omni-channel basis. As our store and online operations have similar economic characteristics, products, services and customers, our operations constitute a single omni-channel reportable segment.
 
Our fiscal year ends on the Saturday closest to July 31.  Like many other retailers, we follow a 4-5-4 reporting calendar, which means that each fiscal quarter consists of thirteen weeks divided into periods of four weeks, five weeks and four weeks.  All

41

references to (i) the second quarter of fiscal year 2019 relate to the thirteen weeks ended January 26, 2019 (ii) the second quarter of fiscal year 2018 relate to the thirteen weeks ended January 27, 2018, (iii) year-to-date fiscal 2019 relate to the twenty-six weeks ended January 26, 2019 and (iv) year-to-date fiscal 2018 relate to the twenty-six weeks ended January 27, 2018.

As described in Note 1 to the Condensed Consolidated Financial Statements, the adoption of new accounting guidance in the first quarter of fiscal year 2019 resulted in (i) the inclusion of income from our credit card program within revenues and (ii) the reclassification of net periodic costs associated with certain of our retirement benefit plans from selling, general and administrative expenses to benefit plan expense, net. In addition, the adoption of this guidance accelerated the recognition of (i) online sales to the time of shipment rather than delivery (to coincide with the transfer of control to the customer) and (ii) direct response advertising costs to incurrence.

Additionally, we have determined that our previous income statement classification of certain reserves for sales returns and promotional programs resulted in the overstatement of previously reported revenues and cost of goods sold by $2.1 million in the second quarter of fiscal year 2018 and $26.7 million in year-to-date fiscal 2018. We evaluated the effects of these overstatements on prior periods' consolidated financial statements, individually and in the aggregate, and concluded that no prior period is materially misstated. However, we have revised the consolidated financial statements for the periods presented herein. The corrections had no impact on net earnings (loss).

Certain amounts presented in tables are subject to rounding adjustments and, as a result, the totals in such tables may not sum.

Investments and Strategic Initiatives

We are investing in strategies to grow our revenues and profits. Strategies we have pursued and continue to pursue include:

•
Deepening customer relationships: We continue to make significant enhancements to our customer data platform to improve upon our ability to anticipate and deliver on our customers' needs and desires. These initiatives are focused on leveraging technology to personalize our customers' experiences with our brands and create more relevant two-way communications. We are also working to enhance the data provided to our sales associates to enable more insightful recommendations and increase conversion by optimizing customer interactions.
•
Building seamless experiences: To strengthen our competitive position, we believe it is crucial to extend our focus beyond individual transactions and create one seamless and enriching shopping experience across our physical and digital environments. As a result, we are committed to offering integrated experiences to address our customers' evolving shopping behaviors.
•
Transforming how we buy and sell: We are transforming how we connect emotionally with our customers through our brand story, exceptional and unique luxury merchandise, relevant service model and store of the future.

In connection with these strategies, we are also making capital investments in our infrastructure and existing stores and opening new stores in select markets such as New York City (opening in March 2019).

Summary of Results of Operations
 
A summary of our results of operations is as follows:

•
Revenues — Total revenues for the second quarter of fiscal year 2019 were $1,394.1 million, a decrease of 6.7% compared to the second quarter of fiscal year 2018. Comparable sales for the second quarter of fiscal year 2019 increased 0.7% compared to the second quarter of fiscal year 2018. Total revenues for year-to-date fiscal 2019 were $2,498.5 million, a decrease of 4.0% compared to year-to-date fiscal 2018. Comparable sales for year-to-date fiscal 2019 increased 1.6% compared to year-to-date fiscal 2018.
In the second quarter of fiscal year 2019, sales generated by our online operations were $433.4 million, or 31.1% of revenues, representing a comparable sales increase of 5.2% compared to the prior year. In year-to-date fiscal 2019, sales generated by our online operations were $799.4 million, or 32.0% of revenues, representing a comparable sales increase of 6.9% compared to prior year. Components of revenue are as follows:
•
Net sales generated by U.S. operations — In the second quarter of fiscal year 2019, net sales generated by U.S. operations were $1,380.3 million, a decrease of 0.8% compared to the second quarter of fiscal year 2018. Comparable sales from U.S. operations for the second quarter of fiscal year 2019 increased 0.7% compared to the second quarter of fiscal year 2018. In year-to-date fiscal 2019, net sales generated by U.S. operations were

42

$2,413.0 million, which remained flat compared to year-to-date fiscal 2018. Comparable sales from U.S. operations for year-to-date fiscal 2019 increased 1.1% compared to year-to-date fiscal 2018.
•
Net sales generated by MyTheresa operations — Subsequent to the Distribution, net sales generated by MyTheresa are no longer included in consolidated revenues. As a result, consolidated revenues for the second quarter of fiscal year 2019 exclude net sales generated by MyTheresa operations. Prior to the Distribution, MyTheresa generated net sales of $60.1 million in fiscal year 2019 which are included in our consolidated revenues for year-to-date fiscal 2019. MyTheresa comparable sales for the period prior to the Distribution in fiscal year 2019 increased 27.3% from the corresponding prior year period.
•
Other revenues, net — In the second quarter of fiscal year 2019, other revenues, net, which primarily consists of income from our credit card program, were $13.8 million, a decrease of 1.9% compared to the second quarter of fiscal year 2018. In year-to-date fiscal 2019, other revenues, net were $25.4 million, a decrease of 2.0% compared to year-to-date fiscal 2018.

•
Cost of Goods Sold Including Buying and Occupancy Costs (Excluding Depreciation) ("COGS") — Compared to the corresponding periods of the prior year, total COGS, as a percentage of revenues, increased approximately 40 basis points in the second quarter of fiscal year 2019 and 30 basis points in year-to-date fiscal 2019. COGS related to our U.S. operations increased, as a percentage of U.S. revenues, approximately 20 basis points in the second quarter of fiscal year 2019 and remained flat in year-to-date fiscal 2019 compared to the corresponding prior year periods. The increases in U.S. COGS, as a percentage of U.S. revenues, for the second quarter of fiscal year 2019 were attributable primarily to:
•
lower product margins due primarily to higher delivery and processing costs in the second quarter; and
•
the deleveraging of buying and occupancy costs on lower revenues in the second quarter.

At January 26, 2019, consolidated inventories totaled $999.3 million, a decrease of 12.1% from January 27, 2018.  Merchandise inventories supporting our U.S. operations decreased 2.3% from the corresponding prior year period. We have worked aggressively to align our inventory levels and purchases with anticipated customer demand. Consolidated inventories at January 27, 2018 included $113.8 million related to MyTheresa operations. Subsequent to the Distribution, the inventory balances of MyTheresa are no longer included in our consolidated inventories.

•
Selling, General and Administrative Expenses (Excluding Depreciation) ("SG&A") — Compared to the corresponding periods of the prior year, SG&A expenses increased, as a percentage of revenues, by approximately 70 basis points in the second quarter of fiscal year 2019 and decreased, as a percentage of revenues, by approximately 20 basis points in year-to-date fiscal 2019. Base U.S. SG&A expenses increased, as a percentage of U.S. revenues, by approximately 110 basis points in the second quarter of fiscal year 2019 and 50 basis points in year-to-date fiscal 2019. The higher levels of base U.S. SG&A expenses, as a percentage of U.S. revenues, were primarily attributable to:
•
higher marketing expenses related primarily to the growth of our online operations; and
•
higher pre-opening expenses incurred primarily in connection with the new Hudson Yards store opening in March 2019.

Liquidity

Net cash used for our operating activities of $25.2 million in year-to-date fiscal 2019 increased by $220.8 million from net cash provided by operating activities of $195.5 million in year-to-date fiscal 2018. This increase in net cash used for our operating activities was due primarily to (i) higher net working capital requirements, (ii) higher annual incentive bonus payments and (iii) higher cash interest requirements due primarily to cash interest payments on the PIK Toggle Notes in fiscal year 2019 compared to PIK interest in fiscal year 2018. At January 26, 2019, we had $272.0 million of borrowings outstanding under our Asset-Based Revolving Credit Facility and $1.3 million letters of credit. Our borrowings under the Asset-Based Revolving Credit Facility fluctuate based on our seasonal working capital requirements, which generally peak in our first and third quarters. At January 26, 2019, we had unused borrowing commitments aggregating $626.8 million, subject to a borrowing base, of which $90.0 million of such capacity is available to us subject to certain restrictions as more fully described in Note 6 of the Notes to Condensed Consolidated Financial Statements in Part I — Item 1. Additionally, we held cash and cash equivalents and credit card receivables of $77.8 million bringing our available liquidity to $704.6 million at January 26, 2019. We believe that cash generated from our operations along with our existing cash balances and available sources of financing will enable us to meet our anticipated cash obligations during the next 12 months.



43

Outlook

Economic conditions in the luxury retail industry have been and will continue to be impacted by a number of factors, including the rate of economic growth, the volatility and uncertainty in domestic and global economic and political conditions, fluctuations in the exchange rate of the U.S. dollar against international currencies, most notably the Euro and British pound, fluctuations in crude oil and fuel prices, uncertainty regarding governmental policies and overall consumer confidence. We believe such factors could have an adverse impact on our future results of operations. As a result, we intend to operate our business and manage our cash requirements in a way that balances these economic conditions and current business trends with our long-term initiatives and growth strategies.

Results of Operations

Performance Summary

The following table sets forth certain items expressed as percentages of revenues for the periods indicated:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Net sales
 
99.0
 %
 
99.1
 %
 
99.0
 %
 
99.0
 %
Other revenues, net
 
1.0

 
0.9

 
1.0

 
1.0

Total revenues
 
100.0

 
100.0

 
100.0

 
100.0

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
68.8

 
68.4

 
66.4

 
66.1

Selling, general and administrative expenses (excluding depreciation)
 
22.2

 
21.5

 
23.5

 
23.7

Depreciation expense
 
3.4

 
3.6

 
3.9

 
4.2

Amortization of intangible assets
 
0.8

 
0.8

 
0.9

 
0.9

Amortization of favorable lease commitments
 
0.9

 
0.9

 
1.0

 
1.0

Other expenses
 
0.9

 
0.8

 
0.9

 
0.6

Operating earnings
 
3.1

 
4.0

 
3.5

 
3.5

Benefit plan expense, net
 
0.1

 
—

 
0.1

 
—

Interest expense, net
 
5.8

 
5.1

 
6.5

 
5.9

Loss before income taxes
 
(2.8
)
 
(1.1
)
 
(3.1
)
 
(2.4
)
Income tax benefit
 
(0.7
)
 
(26.1
)
 
(0.8
)
 
(15.7
)
Net earnings (loss)
 
(2.1
)%
 
24.9
 %
 
(2.3
)%
 
13.3
 %

44

Set forth in the following table is certain summary information with respect to our operations for the periods indicated:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(dollars in millions, except sales per square foot and store count)
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Change in comparable sales (1)
 
 
 
 

 
 
 
 
Total sales
 
0.7
%
 
6.4
%
 
1.6
%
 
5.3
%
Online sales
 
5.2
%
 
15.1
%
 
6.9
%
 
15.2
%
 
 
 
 
 
 
 
 
 
Percentage of revenues transacted online (2)
 
31.1
%
 
33.8
%
 
32.0
%
 
33.1
%
 
 
 
 
 
 
 
 
 
Store count
 
 

 
 

 
 

 
 
Neiman Marcus and Bergdorf Goodman full-line stores open at end of period
 
44

 
44

 
44

 
44

Last Call stores open at end of period
 
24

 
27

 
24

 
27

 
 
 
 
 
 
 
 
 
Sales per square foot (3)
 
$
152

 
$
154

 
$
268

 
$
271

 
 
 
 
 
 
 
 
 
Capital expenditures (4)
 
$
46.5

 
$
41.1

 
$
84.1

 
$
65.8

Depreciation expense
 
47.8

 
53.4

 
98.5

 
108.7

Rent expense and related occupancy costs
 
27.5

 
30.9

 
55.1

 
59.2

 
 
 
 
 
 
 
 
 
Non-GAAP financial measures
 
 

 
 

 
 
 
 
EBITDA (5)
 
$
113.6

 
$
137.2

 
$
230.7

 
$
248.3

Adjusted EBITDA (5)
 
$
134.4

 
$
154.8

 
$
269.7

 
$
277.2

U.S. Adjusted EBITDA (5)
 
$
134.4

 
$
147.5

 
$
270.6

 
$
267.4


(1)
Comparable sales include (i) sales derived from our retail stores open for more than fifty-two weeks, including stores that have been relocated or expanded, and (ii) sales from our online operations.  Comparable sales exclude sales of closed stores.
Comparable sales for the second quarter of fiscal year 2018 exclude sales from MyTheresa operations. Comparable sales for year-to-date fiscal 2018 include sales from MyTheresa operations only for August and September 2017.

(2) 
Percentage of revenues transacted online includes the operating results of MyTheresa for the periods prior to the Distribution. Excluding the operations of MyTheresa, the percentage of net sales from U.S. operations transacted online was 31.4% for the thirteen weeks ended January 26, 2019, 29.9% for the thirteen weeks ended January 27, 2018, 30.6% for the twenty-six weeks ended January 26, 2019 and 28.9% for the twenty-six weeks ended January 27, 2018.

(3) 
Sales per square foot are calculated as revenues of our Neiman Marcus and Bergdorf Goodman full-line stores for the applicable period divided by weighted average square footage.  Weighted average square footage includes a percentage of period-end square footage for new and closed stores equal to the percentage of the period during which they were open.

(4)
Amounts represent gross capital expenditures and exclude developer contributions of $7.9 million for the thirteen weeks ended January 26, 2019, $12.4 million for the thirteen weeks ended January 27, 2018, $10.1 million for the twenty-six weeks ended January 26, 2019 and $11.7 million for the twenty-six weeks ended January 27, 2018.
 
(5) 
For an explanation of EBITDA and Adjusted EBITDA as measures of our operating performance and a reconciliation to net earnings (loss), see "— Non-GAAP Financial Measures."

Key Factors Affecting Our Results
 
Revenues.  We generate our revenues from the sale of luxury merchandise. Components of our revenues include:


45

•
Sales of merchandise — Revenues are recognized at the point-of-sale or upon shipment of goods to the customer.  Revenues are reduced when our customers return goods previously purchased. We maintain reserves for anticipated sales returns based primarily on our historical trends. Revenues exclude sales taxes collected from our customers.
•
Delivery and processing — We generate revenues from delivery and processing charges related to certain merchandise deliveries to our customers.
•
Other revenues, net — We maintain a proprietary credit card program through which credit is extended to customers and have a related marketing and servicing alliance with a third-party credit provider.  We receive payments based on sales transacted on our proprietary credit cards.  We recognize income from our credit card program when earned.
 
Our revenues can be affected by the following factors:

•
our ability to anticipate, identify and respond effectively to changing consumer demands, fashion trends and consumer shopping preferences and acquire goods meeting customers’ tastes and preferences;
•
general domestic and global economic and industry conditions, including inflation, deflation, changes related to interest rates and foreign currency exchange rates, rates of economic growth, current and expected unemployment levels and government fiscal and monetary policies;
•
the performance of the financial, equity and credit markets;
•
consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt and consumer behaviors towards incurring and paying debt;
•
national and global geo-political uncertainty;
•
changes in the level of consumer spending generally and, specifically, on luxury goods;
•
the strength of the U.S. dollar against international currencies, most notably the Euro and British pound, and a resulting impact on tourism and spending by international customers in the U.S.;
•
a significant and sustained decline in the global price for crude oil and the resulting impact on stakeholders in the oil and gas industries, particularly in the Texas markets in which we have a significant presence;
•
changes in prices for commodities and energy, including fuel;
•
current and expected tax rates and policies;  
•
a material disruption in our information systems, or delays or difficulties in implementing or integrating new systems or enhancing or expanding current systems, or our failure to achieve the anticipated benefits of any new or updated information systems;
•
changes in the level of full-price sales; 
•
changes in the level and timing of promotional events conducted;
•
changes in the level of delivery and processing revenues collected from our customers; and
•
changes in the composition and the rate of growth of our sales transacted in store and online.

Our revenues and earnings can also be affected by our relationships with sources of merchandise and the terms on which they are willing to supply to us. Certain of our top designers or brand partners have converted or are considering converting from wholesale arrangements to concession arrangements, whereby the designer merchandises its boutique within our store and pays us a pre-determined percentage of revenues derived from the sale of such merchandise. 

In addition, our revenues are seasonal, as discussed below under "Seasonality."

Cost of Goods Sold Including Buying and Occupancy Costs (Excluding Depreciation).  COGS consists of the following components:

•
Inventory costs — We utilize the retail inventory method of accounting. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are determined by applying a calculated cost-to-retail ratio, for various groupings of similar items, to the retail value of our inventories. The cost of the inventory reflected in the Condensed Consolidated Financial Statements is decreased by charges to cost of goods sold at average cost and the retail value of the inventory is lowered through the use of markdowns. Earnings are negatively impacted when merchandise is marked down.

46

With the introduction of new fashions in the first and third fiscal quarters of each fiscal year and our emphasis on full-price selling in these quarters, a lower level of markdowns and higher margins are characteristic of these quarters. 
Inventory costs are also decreased by charges to cost of goods sold for estimates of shrinkage that has occurred between physical count dates.
•
Buying costs — Buying costs consist primarily of salaries and expenses incurred by our merchandising and buying operations. 
•
Occupancy costs — Occupancy costs consist primarily of rent, property taxes and operating costs of our retail, distribution and support facilities. A significant portion of our buying and occupancy costs are fixed in nature and are not dependent on the revenues we generate. 
•
Delivery and processing costs — Delivery and processing costs consist primarily of delivery charges we pay to third party carriers and other costs related to the fulfillment of customer orders not delivered at the point-of-sale.

Consistent with industry business practice, we receive allowances from certain of our designers in support of the merchandise we purchase for resale.  Certain allowances are received to reimburse us for markdowns taken or to support the gross margins that we earn in connection with the sales of the designers’ merchandise.  These allowances result in an increase to gross margin when we earn the allowances and they are approved by the designer.  Other allowances we receive represent reductions to the amounts we pay to acquire the merchandise.  These allowances reduce the cost of the acquired merchandise and are recognized at the time the goods are sold.  We received merchandise allowances of $37.2 million, or 2.7% of revenues, in the second quarter of fiscal year 2019, $38.8 million, or 2.6% of revenues, in the second quarter of fiscal year 2018, $40.5 million, or 1.6% of revenues, in year-to-date fiscal 2019 and $42.3 million, or 1.6% of revenues, in year-to-date fiscal 2018. The amounts of merchandise allowances we receive fluctuate based partially on the level of markdowns taken and did not have a significant impact on the year-over-year change in gross margin during year-to-date fiscal 2019 and 2018.

Changes in our COGS as a percentage of revenues can be affected by the following factors:

•
our ability to order an appropriate amount of merchandise to match customer demand and the related impact on the level of net markdowns and promotions costs incurred; 
•
customer acceptance of and demand for the merchandise we offer in a given season and the related impact of such factors on the level of full-price sales; 
•
factors affecting revenues generally, including pricing and promotional strategies, product offerings and actions taken by competitors; 
•
changes in delivery and processing costs and our ability to pass such costs on to our customers; 
•
changes in occupancy costs associated primarily with the opening of new stores or distribution facilities; and 
•
the amount of designer reimbursements we receive during the reporting period.
 
Selling, General and Administrative Expenses (Excluding Depreciation).  SG&A consists principally of costs related to employee compensation and benefits in the selling and administrative support areas and advertising and marketing costs.  A significant portion of our SG&A expenses is variable in nature and is dependent on the revenues we generate.

Advertising costs consist primarily of (i) online marketing costs, (ii) advertising costs incurred related to the production of the photographic content for our websites and (iii) costs incurred related to the production, printing and distribution of our print catalogs and other promotional materials mailed to our customers. We receive advertising allowances from certain of our designers.  Substantially all the advertising allowances we receive represent reimbursements of direct, specific and incremental costs that we incur to promote the designers' merchandise in connection with our various advertising programs, primarily catalogs and other print media and digital media. Advertising allowances fluctuate based on the level of advertising expenses incurred and are recorded as a reduction of our advertising costs when earned. Advertising allowances collected were approximately $7.0 million, or 0.5% of revenues, in the second quarter of fiscal year 2019, $8.9 million, or 0.6% of revenues, in the second quarter of fiscal year 2018, $24.9 million, or 1.0% of revenues, in year-to-date fiscal 2019 and $26.0 million, or 1.0% of revenues, in year-to-date fiscal 2018.

We also receive allowances from certain designers in connection with compensation programs for employees who sell the designers’ merchandise. These allowances are netted against the related compensation expenses that we incur. Amounts received from designers related to compensation programs were $15.3 million, or 1.1% of revenues, in the second quarter of fiscal year 2019, $15.4 million, or 1.0% of revenues, in the second quarter of fiscal year 2018, $30.7 million, or 1.2% of revenues, in year-to-date fiscal 2019 and $29.9 million, or 1.2% of revenues, in year-to-date fiscal 2018.

47

Changes in our SG&A expenses are affected primarily by the following factors:

•
changes in the level of our revenues;
•
changes in the number of sales associates, which are due primarily to new store openings and closings and expansion of existing stores, and the health care and related benefits expenses incurred as a result of such changes; 
•
changes in expenses incurred in connection with our advertising and marketing programs; and 
•
changes in expenses related to employee benefits due to general economic conditions such as rising health care costs.
 
Effective Income Tax Rate. Our effective income tax rate may fluctuate from period to period due to a variety of factors, including changes in our assessment of certain tax contingencies, valuation allowances, changes in federal, state and foreign tax laws, outcomes of administrative audits, changes in our corporate structure, the impact of other discrete or non-recurring items and the mix of earnings among our U.S. and foreign operations, where the statutory rates may exceed those in the United States. As a result, our effective income tax rate may vary significantly from the federal statutory tax rate.

Seasonality

We conduct our selling activities in two primary selling seasons—Fall and Spring. The Fall season is comprised of our first and second fiscal quarters and the Spring season is comprised of our third and fourth fiscal quarters.
 
Our first fiscal quarter is generally characterized by a higher level of full-price sales with a focus on the initial introduction of Fall season fashions. Marketing activities designed to stimulate customer purchases, a lower level of markdowns and higher margins are characteristic for this quarter. Our second fiscal quarter is more focused on promotional activities related to the December holiday season, the early introduction of resort season collections from certain designers and the sale of Fall season goods on a marked down basis. As a result, margins are typically lower in our second fiscal quarter. However, due to the seasonal increase in revenues that occurs during the holiday season, our second fiscal quarter is typically the quarter in which our revenues are the highest and in which expenses as a percentage of revenues are the lowest. Our working capital requirements are also the greatest in the Fall season as a result of higher seasonal requirements, which generally peak in our first fiscal quarter.
 
Our third fiscal quarter is generally characterized by a higher level of full-price sales with a focus on the initial introduction of Spring season fashions. Marketing activities designed to stimulate customer purchases, a lower level of markdowns and higher margins are again characteristic for this quarter. Revenues are generally the lowest in our fourth fiscal quarter with a focus on promotional activities offering Spring season goods to customers on a marked down basis, resulting in lower margins during the quarter. Our working capital requirements are typically lower in the Spring season as a result of lower seasonal requirements, which generally peak in our third fiscal quarter.
 
A large percentage of our merchandise assortment, particularly in the apparel, fashion accessories and shoe categories, is ordered months in advance of the introduction of such goods. For example, women’s apparel, men’s apparel, shoes and handbags are typically ordered six to nine months in advance of the products being offered for sale while jewelry and other categories are typically ordered three to six months in advance. As a result, our success depends in large part on our ability to anticipate and identify fashion trends and consumer shopping preferences and to identify and react effectively to rapidly changing consumer demands in a timely manner.

We monitor the sales performance of our inventories throughout each season.  We seek to order additional goods to supplement our original purchasing decisions when the level of customer demand is higher than originally anticipated.  However, in certain merchandise categories, particularly fashion apparel, our ability to purchase additional goods can be limited.  This can result in lost sales opportunities in the event of higher than anticipated demand for the merchandise we offer or a higher than anticipated level of consumer spending.  Conversely, in the event we buy merchandise that is not accepted by our customers or the level of consumer spending is less than we anticipated, we could incur a higher than anticipated level of markdowns, net of merchandise allowances, resulting in lower operating profits.  Any failure on our part to anticipate, identify and respond effectively to these changes could adversely affect our business, financial condition and results of operations.


48

Results of Operations for the Thirteen Weeks Ended January 26, 2019 Compared to the Thirteen Weeks Ended January 27, 2018

Revenues.  Total revenues for the second quarter of fiscal year 2019 of $1,394.1 million decreased by $100.0 million, or 6.7%, from $1,494.1 million in the second quarter of fiscal year 2018. The components of our revenues are:

 
 
Thirteen weeks ended
 
 
January 26, 2019
 
January 27, 2018
(in millions, except percentages)
 
$
 
Comparable Sales
 
$
 
Comparable Sales
 
 
 
 
 
 
 
 
 
Net sales from U.S. operations
 
$
1,380.3

 
0.7
%
 
$
1,391.3

 
4.8
%
Net sales from MyTheresa operations (1)
 
—

 
—
%
 
88.7

 
39.6
%
Total net sales
 
1,380.3

 
0.7
%
 
1,480.0

 
6.4
%
Other revenues, net
 
13.8

 

 
14.1

 

Total revenues
 
$
1,394.1

 
 
 
$
1,494.1

 
 
 
(1)
Our Condensed Consolidated Statements of Operations exclude the operating results of MyTheresa for the second quarter of fiscal year 2019 whereas the second quarter of fiscal year 2018 includes the operating results of MyTheresa.

Comparable sales for the second quarter of fiscal year 2019 were $1,380.3 million compared to $1,370.4 million in the second quarter of fiscal year 2018, representing an increase of 0.7%.

•
Net sales generated by U.S. operations — In the second quarter of fiscal year 2019, net sales generated by U.S. operations were $1,380.3 million, a decrease of 0.8% compared to the second quarter of fiscal year 2018. Comparable sales from U.S. operations for the second quarter of fiscal year 2019 increased 0.7% compared to the second quarter of fiscal year 2018. Sales generated by our U.S. online operations were $433.4 million, or 31.1% of our total U.S. revenues, in the second quarter of fiscal year 2019. Comparable sales from our U.S. online operations for the second quarter of fiscal year 2019 increased 5.2% from the second quarter of fiscal year 2018.

•
Other revenues, net — In the second quarter of fiscal year 2019, other revenues, net, which primarily consists of income from our credit card program, were $13.8 million, a decrease of 1.9% compared to the second quarter of fiscal year 2018.

Cost of Goods Sold Including Buying and Occupancy Costs (Excluding Depreciation). COGS as a percentage of revenues increased to 68.8% of revenues in the second quarter of fiscal year 2019 from 68.4% of revenues in the second quarter of fiscal year 2018. The components of COGS consisted of:
 
 
Thirteen weeks ended
 
 
January 26, 2019
 
January 27, 2018
(in millions, except percentages)
 
$
 
% of revenues
 
$
 
% of revenues
 
 
 
 
 
 
 
 
 
U.S. COGS (1)
 
$
958.5

 
68.8
%
 
$
964.3

 
68.6
%
MyTheresa COGS (2)
 
—

 

 
57.7

 

Total COGS (3)
 
$
958.5

 
68.8
%
 
$
1,022.0

 
68.4
%
 
(1)
Presented on the basis of U.S. revenues, inclusive of other revenues, net.
(2)
Our Condensed Consolidated Statements of Operations exclude the operating results of MyTheresa for the second quarter of fiscal year 2019 whereas the second quarter of fiscal year 2018 includes the operating results of MyTheresa.
(3)
Presented on the basis of consolidated revenues.

The increase in U.S. COGS, as a percentage of U.S. revenues, of approximately 20 basis points compared to the prior year was primarily attributable to:
•
lower product margins of approximately 10 basis points due primarily to higher delivery and processing costs; and
•
the deleveraging of buying and occupancy costs of approximately 10 basis points on lower revenues.

49

Selling, General and Administrative Expenses (Excluding Depreciation).  SG&A expenses as a percentage of revenues increased to 22.2% of revenues in the second quarter of fiscal year 2019 compared to 21.5% of revenues in the second quarter of fiscal year 2018. The components of SG&A expense consisted of:
 
 
Thirteen weeks ended
 
 
January 26, 2019
 
January 27, 2018
(in millions, except percentages)
 
$
 
% of revenues
 
$
 
% of revenues
 
 
 
 
 
 
 
 
 
Base U.S. SG&A (1)
 
$
302.5

 
21.7
%
 
$
289.9

 
20.6
%
U.S. net incentive compensation costs and other benefits (1)
 
6.7

 
0.5
%
 
8.4

 
0.6
%
Total U.S. SG&A expenses (1)
 
309.2

 
22.2
%
 
298.3

 
21.2
%
MyTheresa SG&A (2)
 
—

 

 
23.6

 

Total SG&A (3)
 
$
309.2

 
22.2
%
 
$
321.9

 
21.5
%
 
(1)
Presented on the basis of U.S. revenues, inclusive of other revenues, net.
(2)
Our Condensed Consolidated Statements of Operations exclude the operating results of MyTheresa for the second quarter of fiscal year 2019 whereas the second quarter of fiscal year 2018 includes the operating results of MyTheresa.
(3)
Presented on the basis of consolidated revenues.

Base U.S. SG&A expenses increased, as a percentage of U.S. revenues, approximately 110 basis points compared to the prior year due primarily to:
•
higher marketing expenses of approximately 50 basis points related primarily to the growth of our online operations;
•
higher pre-opening expenses of approximately 30 basis points incurred primarily in connection with the new Hudson Yards store opening in March 2019; and
•
higher payroll and related costs of approximately 20 basis points due primarily to timing with the first quarter of fiscal year 2019.

U.S. net incentive compensation costs and other benefits costs aggregated $6.7 million, or 0.5% of U.S. revenues, in the second quarter of fiscal year 2019 compared to $8.4 million, or 0.6% of U.S. revenues, in the second quarter of fiscal year 2018, a decrease of approximately 10 basis points compared to the prior year. This decrease is due primarily to:
•
lower levels of current and long-term cash incentive costs of approximately 60 basis points; and
•
non-recurring non-cash charges related to the modifications of certain stock options of approximately 10 basis points recorded in the second quarter of fiscal year 2018; partially offset by
•
a non-recurring non-cash gain related to a change in our vacation policy of approximately 60 basis points recorded in the second quarter of fiscal year 2018.

Depreciation and Amortization Expenses.  Depreciation expense was $47.8 million, or 3.4% of revenues, in the second quarter of fiscal year 2019 compared to $53.4 million, or 3.6% of revenues, in the second quarter of fiscal year 2018.

Amortization of intangible assets (primarily customer lists and favorable lease commitments) was $23.2 million, or 1.7% of revenues, in the second quarter of fiscal year 2019 compared to $24.3 million, or 1.6% of revenues, in the second quarter of fiscal year 2018. 


50

Other Expenses.  Other expenses for the second quarter of fiscal year 2019 were $11.9 million, or 0.9% of revenues, compared to $12.6 million, or 0.8% of revenues, in the second quarter of fiscal year 2018. Other expenses consisted of the following components:
 
 
Thirteen weeks ended
(in millions)
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
Expenses incurred in connection with strategic initiatives
 
$
9.1

 
$
1.4

Expenses related to store closures
 
—

 
6.6

Other expenses
 
2.8

 
4.6

Total
 
$
11.9

 
$
12.6


We incurred consulting and professional fees in connection with key strategic operational projects and the implementation of strategic initiatives, including those described above under "Investments and Strategic Initiatives".

In connection with our assessment of our Last Call footprint, we closed 14 stores in fiscal year 2018. Expenses related to these store closures consisted primarily of severance and store closing costs.

We also incurred expenses related to organizational and operational realignments, primarily severance costs, in the second quarter of fiscal year 2019.

In connection with the retirement of our former Chief Executive Officer and President, we incurred certain charges primarily related to lump sum compensation payable as a consequence of her retirement of approximately $4.6 million in the second quarter of fiscal year 2018.

Interest Expense, net.  Net interest expense was $81.4 million in the second quarter of fiscal year 2019 and $76.5 million for the second quarter of fiscal year 2018. The significant components of interest expense are as follows:
 
 
Thirteen weeks ended
(in millions)
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
$
3.0

 
$
1.5

Senior Secured Term Loan Facility
 
37.1

 
33.8

Cash Pay Notes
 
19.2

 
19.2

PIK Toggle Notes
 
14.4

 
14.9

2028 Debentures
 
2.2

 
2.2

Amortization of debt issue costs
 
6.1

 
6.1

Capitalized interest
 
(1.1
)
 
(1.8
)
Other, net
 
0.5

 
0.6

Interest expense, net
 
$
81.4

 
$
76.5

  
Income Tax Benefit.  Our income tax benefit was $9.8 million for the second quarter of fiscal year 2019 and $389.6 million for the second quarter of fiscal year 2018. The components of our tax benefits consisted of:

 
 
Thirteen weeks ended
 
 
January 26, 2019
 
January 27, 2018
(in millions, except percentages)
 
$
 
Effective Income Tax Rate
 
$
 
Effective Income Tax Rate
 
 
 
 
 
 
 
 
 
Income tax benefit excluding impact of Tax Reform
 
$
(9.8
)
 
25.3
%
 
$
(1.8
)
 
10.9
%
Impact of Tax Reform
 
—

 
—
%
 
(387.8
)
 
2,266.8
%
Total income tax benefit
 
$
(9.8
)
 
25.3
%
 
$
(389.6
)
 
2,277.7
%

Our effective income tax rate of 25.3% on the loss for the second quarter of fiscal year 2019 exceeded the federal statutory rate of 21% due primarily to state income taxes.


51

Included in the income tax benefit recognized in the second quarter of fiscal year 2018 is the impact of the Tax Cuts and Jobs Act ("Tax Reform"), which was signed into law on December 22, 2017. Among numerous provisions included in the Tax Reform was the reduction of the corporate federal income tax rate from 35% to 21% effective January 1, 2018. As the effective date of the Tax Reform fell five months into our fiscal year, we were subject to a blended federal statutory rate of 26.9% in fiscal year 2018. In connection with our application of the new federal statutory rate in fiscal year 2018, we measured our long-term deferred income taxes at the new lower rate and recorded non-cash benefits aggregating $391.6 million, of which amount $387.8 million was recorded in the second quarter of fiscal year 2018. Excluding the impact of the Tax Reform, our effective income tax rate of 10.9% on the loss for the second quarter of fiscal year 2018 was below the blended federal statutory rate of 26.9% due primarily to the impact of the transition to the lower annualized federal statutory rate.


Results of Operations for the Twenty-six Weeks Ended January 26, 2019 Compared to the Twenty-six Weeks Ended January 27, 2018
 
Revenues.  Total revenues for year-to-date fiscal 2019 of $2,498.5 million decreased by $103.1 million, or 4.0%, from $2,601.7 million in year-to-date fiscal 2018. The components of our revenues are:
 
 
Twenty-six weeks ended
 
 
January 26, 2019
 
January 27, 2018
(in millions, except percentages)
 
$
 
Comparable Sales
 
$
 
Comparable Sales
 
 
 
 
 
 
 
 
 
Net sales from U.S. operations
 
$
2,413.0

 
1.1
%
 
$
2,412.9

 
3.8
%
Net sales from MyTheresa operations (1)
 
60.1

 
27.3
%
 
162.8

 
34.2
%
Total net sales
 
2,473.1

 
1.6
%
 
2,575.7

 
5.3
%
Other revenues, net
 
25.4

 
 
 
25.9

 
 
Total revenues
 
$
2,498.5

 
 
 
$
2,601.7

 
 
 
(1)
Our Condensed Consolidated Statements of Operations exclude the operating results of MyTheresa subsequent to the Distribution. As a result, the operating results of MyTheresa are included for only the two months prior to the Distribution in year-to-date fiscal 2019. Year-to-date fiscal 2018 includes the operating results of MyTheresa for the entire period.

Comparable sales for year-to-date fiscal 2019 were $2,473.1 million compared to $2,433.0 million in year-to-date fiscal 2018, representing an increase of 1.6%. Revenues generated by our online operations were $799.4 million, or 32.0% of revenues. Comparable sales from our online operations for year-to-date fiscal 2019 increased 6.9% compared to the corresponding prior year period.

•
Net sales generated by U.S. operations — In year-to-date fiscal 2019, net sales generated by U.S. operations were $2,413.0 million, which remained flat compared to year-to-date fiscal 2018. Comparable sales from U.S. operations for year-to-date fiscal 2019 increased 1.1% compared to year-to-date fiscal 2018. Sales generated by our U.S. online operations were $739.3 million, or 30.3% of our total U.S. revenues, in year-to-date fiscal 2019. Comparable sales from our U.S. online operations for year-to-date fiscal 2019 increased 5.5% from year-to-date fiscal 2018.

•
Net sales generated by MyTheresa operations — Prior to the Distribution, MyTheresa generated net sales of $60.1 million in fiscal year 2019, or 2.4% of consolidated revenues. MyTheresa comparable sales for the period prior to the Distribution in fiscal year 2019 increased 27.3% from the corresponding prior year period.

•
Other revenues, net — In year-to-date fiscal 2019, other revenues, net, which primarily consists of income from our credit card program, were $25.4 million, a decrease of 2.0% compared to year-to-date fiscal 2018.

Cost of Goods Sold Including Buying and Occupancy Costs (Excluding Depreciation). COGS as a percentage of revenues increased to 66.4% of revenues in year-to-date fiscal 2019 from 66.1% of revenues in year-to-date fiscal 2018. The components of COGS consisted of:

52

 
 
Twenty-six weeks ended
 
 
January 26, 2019
 
January 27, 2018
(in millions, except percentages)
 
$
 
% of revenues
 
$
 
% of revenues
 
 
 
 
 
 
 
 
 
U.S. COGS (1)
 
$
1,614.6

 
66.2
%
 
$
1,613.8

 
66.2
%
MyTheresa COGS (2)
 
44.2

 
 
 
106.5

 
 
Total COGS (3)
 
$
1,658.8

 
66.4
%
 
$
1,720.3

 
66.1
%
 
(1)
Presented on the basis of U.S. revenues, inclusive of other revenues, net.
(2)
Our Condensed Consolidated Statements of Operations exclude the operating results of MyTheresa subsequent to the Distribution. As a result, the operating results of MyTheresa are included for only the two months prior to the Distribution in year-to-date fiscal 2019. Year-to-date fiscal 2018 includes the operating results of MyTheresa for the entire period.
(3)
Presented on the basis of consolidated revenues.

U.S. COGS, as a percentage of U.S. revenues, remained flat for year-to-date fiscal 2019 compared to the corresponding prior year period. The increase in total COGS, as a percentage of revenues, was attributable primarily to higher COGS, as a percentage of revenues, related to MyTheresa operations prior to the Distribution.

Selling, General and Administrative Expenses (Excluding Depreciation). SG&A expenses as a percentage of revenues decreased to 23.5% of revenues in year-to-date fiscal 2019 compared to 23.7% of revenues in year-to-date fiscal 2018. The components of SG&A expense consisted of:
 
 
Twenty-six weeks ended
 
 
January 26, 2019
 
January 27, 2018
(in millions, except percentages)
 
$
 
% of revenues
 
$
 
% of revenues
 
 
 
 
 
 
 
 
 
Base U.S. SG&A (1)
 
$
559.2

 
22.9
%
 
$
547.0

 
22.4
%
U.S. net incentive compensation costs and other benefits (1)
 
10.0

 
0.4
%
 
23.2

 
1.0
%
Total U.S. SG&A expenses (1)
 
569.2

 
23.3
%
 
570.2

 
23.4
%
MyTheresa SG&A (2)
 
16.8

 
 
 
46.5

 
 
Total SG&A (3)
 
$
586.0

 
23.5
%
 
$
616.7

 
23.7
%
 
(1)
Presented on the basis of U.S. revenues, inclusive of other revenues, net.
(2)
Our Condensed Consolidated Statements of Operations exclude the operating results of MyTheresa subsequent to the Distribution. As a result, the operating results of MyTheresa are included for only the two months prior to the Distribution in year-to-date fiscal 2019. Year-to-date fiscal 2018 includes the operating results of MyTheresa for the entire period.
(3)
Presented on the basis of consolidated revenues.

Base U.S. SG&A expenses increased, as a percentage of U.S. revenues, approximately 50 basis points compared to the prior year due primarily to:
•
higher marketing expenses of approximately 60 basis points related primarily to the growth of our online operations; and
•
higher pre-opening expenses of approximately 30 basis points incurred primarily in connection with the new Hudson Yards store opening in March 2019; partially offset by
•
lower corporate expenses, primarily professional fees, of approximately 30 basis points; and
•
favorable payroll and related costs of approximately 10 basis points.

U.S. net incentive compensation costs and other benefits costs aggregated $10.0 million, or 0.4% of U.S. revenues, in year-to-date fiscal 2019 compared to $23.2 million, or 1.0% of U.S. revenues, in year-to-date fiscal 2018, a decrease of approximately 60 basis points compared to the prior year. This decrease is due primarily to:

•
lower levels of current and long-term cash incentive costs of approximately 70 basis points in year-to-date fiscal 2019; and

53

•
non-recurring non-cash charges related to the modifications of certain stock options of approximately 20 basis points recorded in year-to-date fiscal 2018; partially offset by
•
a non-recurring non-cash gain related to a change in our vacation policy of approximately 35 basis points recorded in year-to-date fiscal 2018.

Depreciation and Amortization Expenses.  Depreciation expense of $98.5 million, or 3.9% of revenues, in year-to-date fiscal 2019 compared to $108.7 million, or 4.2% of revenues, in year-to-date fiscal 2018.

Amortization of intangible assets (primarily customer lists and favorable lease commitments) was $46.9 million, or 1.9% of revenues, in year-to-date fiscal 2019 compared to $49.2 million, or 1.9% of revenues, in year-to-date fiscal 2018.
 
Other Expenses.  Other expenses for year-to-date fiscal 2019 aggregated $21.3 million, or 0.9% of revenues, compared to $15.5 million, or 0.6% of revenues, in year-to-date fiscal 2018. Other expenses consisted of the following components:
 
 
Twenty-six weeks ended
(in millions)
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
Expenses incurred in connection with strategic initiatives
 
$
16.1

 
$
1.8

Expenses related to store closures
 
—

 
7.9

Expenses related to Cyber-Attack, net of insurance recoveries
 
—

 
1.1

Other expenses
 
5.2

 
4.6

Total
 
$
21.3

 
$
15.5


We incurred consulting and professional fees in connection with key strategic operational projects and the implementation of strategic initiatives, including those described above under "Investments and Strategic Initiatives".

In connection with our assessment of our Last Call footprint, we closed 14 stores in fiscal year 2018. Expenses related to these store closures consisted primarily of severance and store closing costs.
 
We discovered in January 2014 that malicious software was clandestinely installed on our computer systems (the "Cyber-Attack"). Expenses related to the Cyber-Attack in year-to-date fiscal 2018 consisted primarily of legal expenses.

We also incurred other expenses related to organizational and operational realignments, primarily severance costs, in year-to-date fiscal 2019.

In connection with the retirement of our former Chief Executive Officer and President, we incurred certain charges primarily related to lump sum compensation payable as a consequence of her retirement of approximately $4.6 million in year-to-date fiscal 2018.

Interest Expense, net.  Net interest expense was $162.0 million, or 6.5% of revenues, in year-to-date fiscal 2019 and $152.6 million, or 5.9% of revenues, in year-to-date fiscal 2018. The significant components of interest expense are as follows:
 
 
Twenty-six weeks ended
(in millions)
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
$
5.6

 
$
3.8

Senior Secured Term Loan Facility
 
73.4

 
67.2

Cash Pay Notes
 
38.4

 
38.4

PIK Toggle Notes
 
28.8

 
29.3

2028 Debentures
 
4.5

 
4.5

Amortization of debt issue costs
 
12.2

 
12.2

Capitalized interest
 
(2.1
)
 
(3.6
)
Other, net
 
1.2

 
0.8

Interest expense, net
 
$
162.0

 
$
152.6

 


54

Income Tax Benefit.  Our income tax benefit was $19.6 million for year-to-date fiscal 2019 and $408.5 million for year-to-date fiscal 2018. The components of our tax benefits consisted of:

 
 
Twenty-six weeks ended
 
 
January 26, 2019
 
January 27, 2018
(in millions, except percentages)
 
$
 
Effective Income Tax Rate
 
$
 
Effective Income Tax Rate
 
 
 
 
 
 
 
 
 
Income tax benefit excluding impact of Tax Reform
 
$
(19.6
)
 
25.5
%
 
$
(20.7
)
 
33.3
%
Impact of Tax Reform
 
—

 
—
%
 
(387.8
)
 
623.2
%
Total income tax benefit
 
$
(19.6
)
 
25.5
%
 
$
(408.5
)
 
656.5
%

Our effective income tax rate of 25.5% on the loss for year-to-date fiscal 2019 exceeded the federal statutory rate of 21% due primarily to state income taxes.

Included in the income tax benefit recognized in year-to-date fiscal 2018 is the impact of the Tax Reform, which was signed into law on December 22, 2017. Among numerous provisions included in the Tax Reform was the reduction of the corporate federal income tax rate from 35% to 21% effective January 1, 2018. As the effective date of the Tax Reform fell five months into our fiscal year, we were subject to a blended federal statutory rate of 26.9% in fiscal year 2018. In connection with our application of the new federal statutory rate in fiscal year 2018, we measured our long-term deferred income taxes at the new lower rate and recorded non-cash benefits aggregating $391.6 million, of which amount $387.8 million was recorded in year-to-date fiscal 2018. Excluding the impact of the Tax Reform, our effective income tax rate of 33.3% on the loss for year-to-date fiscal 2018 exceeded the blended federal statutory rate of 26.9% due primarily to state and foreign income taxes.

We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. The Internal Revenue Service ("IRS") is conducting an audit of our short-year 2014 (subsequent to the Acquisition) and fiscal years 2015 through 2017 federal income tax returns. With respect to state, local and foreign jurisdictions, with limited exceptions, we are no longer subject to income tax audits for fiscal years before 2013. We believe our recorded tax liabilities as of January 26, 2019 are sufficient to cover any potential assessments made by the IRS or other taxing authorities and we will continue to review our recorded tax liabilities for potential audit assessments based upon subsequent events, new information and future circumstances. We believe it is reasonably possible that adjustments to the amounts of our unrecognized tax benefits could occur within the next 12 months as a result of settlements with tax authorities or expiration of statutes of limitations. At this time, we do not believe such adjustments will have a material impact on our Condensed Consolidated Financial Statements.


Liquidity and Capital Resources
 
Our liquidity requirements consist principally of:

•
the funding of our merchandise purchases;
•
operating expense requirements;
•
debt service requirements;
•
capital expenditures for expansion and growth strategies, including new store construction, store remodels and upgrades of our management information systems;
•
income tax payments; and
•
obligations related to our defined benefit pension plan ("Pension Plan").

Our primary sources of short-term liquidity are comprised of cash and cash equivalents, credit card receivables and availability under our Asset-Based Revolving Credit Facility. The amounts of cash and cash equivalents and borrowings under the Asset-Based Revolving Credit Facility are influenced by a number of factors, including revenues, working capital levels, payment terms, the level of capital expenditures, cash requirements related to financing instruments and debt service obligations, Pension Plan funding obligations and tax payment obligations, among others.

Our working capital requirements fluctuate during the fiscal year, peaking during the first and third quarters of each fiscal year as a result of higher seasonal levels of inventories. We have typically financed our cash requirements with available cash and cash

55

equivalents, cash flows from operations and, if necessary, with cash provided from borrowings under the Asset-Based Revolving Credit Facility. We had $272.0 million of outstanding borrowings under the Asset-Based Revolving Credit Facility and $1.3 million outstanding letters of credit as of January 26, 2019 compared to $132.0 million of outstanding borrowings and $1.8 million outstanding letters of credit as of January 27, 2018. At January 26, 2019, we had unused borrowing commitments of $626.8 million, subject to a borrowing base, of which $90.0 million of such capacity is available to us subject to the maintenance of a minimum fixed charge coverage ratio and to further restrictions described below under "Financing Structure at January 26, 2019." Additionally, we held cash and cash equivalents and credit card receivables of $77.8 million bringing our available liquidity to $704.6 million at January 26, 2019.

Under the Asset-Based Revolving Credit Facility, if "excess availability" falls below 10% of aggregate revolving commitments, we will be required to maintain a minimum fixed charge coverage ratio and we may be subject to further restrictions as discussed below under "Financing Structure at January 26, 2019".
 
We believe that cash generated from our operations, our existing cash and cash equivalents and available sources of financing will be sufficient to fund our cash requirements during the next 12 months, including merchandise purchases, operating expenses, anticipated capital expenditure requirements, debt service requirements, income tax payments and obligations related to our Pension Plan.

We regularly evaluate our liquidity profile, and various financing, refinancing and other alternatives for opportunities to enhance our capital structure and address maturities under our existing debt arrangements. If opportunities are available on favorable terms, we may seek to refinance, exchange, amend and/or extend the terms of our existing debt or issue or incur additional debt.

As previously disclosed, on March 1, 2019, the Company reached an agreement in principle with the ad hoc committees of Noteholders and Term Lenders regarding the framework of a comprehensive series of transactions to extend the maturities of the Notes and Term Loans, as outlined in a term sheet disclosed in our Current Report on Form 8-K filed on March 1, 2019.

The Company is engaged with the ad hoc committees of Noteholders and Term Lenders in ongoing negotiations with the goal of agreeing on definitive documentation with respect to such transaction. If the Company is unable to complete these transactions as contemplated or any other alternative transaction, on favorable terms or at all, due to market conditions or otherwise, its financial condition could be materially and adversely affected.
 
Net cash used for our operating activities of $25.2 million in year-to-date fiscal 2019 increased by $220.8 million from net cash provided by operating activities of $195.5 million in year-to-date fiscal 2018. This increase in net cash used for our operating activities was due primarily to (i) higher net working capital requirements, (ii) higher annual incentive bonus payments and (iii) higher cash interest requirements due primarily to cash interest payments on the PIK Toggle Notes in fiscal year 2019 compared to PIK interest in fiscal year 2018.

Net cash used for investing activities, representing capital expenditures, of $84.1 million in year-to-date fiscal 2019 increased by $18.3 million from $65.8 million in year-to-date fiscal 2018. This increase in capital expenditures in year-to-date fiscal 2019 reflects higher spending related to the construction of the new Hudson Yards store opening in March 2019 and the remodeling of existing stores.

Currently, we project capital expenditures for fiscal year 2019 to be approximately $200 to $225 million. Net of developer contributions, capital expenditures for fiscal year 2019 are projected to be approximately $170 to $190 million. We have and will continue to manage the level of capital spending in a manner designed to balance current economic conditions and business trends with our long-term initiatives and growth strategies.

Net cash provided by financing activities of $112.1 million in year-to-date fiscal 2019 was comprised primarily of (i) net borrowings of $113.0 million under our Asset-Based Revolving Credit Facility due to a lower level of cash flows from operations, higher seasonal working capital requirements and higher capital expenditures and (ii) net borrowings of $17.7 million under the mytheresa.com Credit Facilities prior to the Distribution due to higher seasonal working capital requirements, partially offset by (iii) repayments of borrowings of $14.7 million under our Senior Secured Term Loan Facility. Net cash used for financing activities of $143.7 million in year-to-date fiscal 2018 was comprised primarily of (i) net repayment of borrowings of $131.0 million under our Asset-Based Revolving Credit Facility due to a higher level of cash flows from operations, lower workings capital requirements and lower capital expenditures and (ii) repayments of borrowings of $14.7 million under our Senior Secured Term Loan Facility.

Subject to applicable restrictions in our credit agreements and indentures, we or our affiliates, at any time and from time to time, may purchase, redeem or otherwise retire our outstanding debt securities or term loans, including through open market or privately

56

negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices, as well as with such consideration, as we, or any of our affiliates, may determine.

Financing Structure at January 26, 2019

Our major sources of funds are comprised of the $900.0 million Asset-Based Revolving Credit Facility, the $2,795.5 million Senior Secured Term Loan Facility, the $960.0 million Cash Pay Notes, the $658.4 million PIK Toggle Notes and the $125.0 million 2028 Debentures (each as described in more detail below).

Asset-Based Revolving Credit Facility.  At January 26, 2019, we have an Asset-Based Revolving Credit Facility with a maximum committed borrowing capacity of $900.0 million. The Asset-Based Revolving Credit Facility matures on July 25, 2021 (or July 25, 2020 if our obligations under our Senior Secured Term Loan Facility or any permitted refinancing thereof have not been repaid or the maturity date thereof has not been extended to October 25, 2021 or later).  At January 26, 2019, we had outstanding borrowings of $272.0 million under this facility, outstanding letters of credit of $1.3 million and unused commitments of $626.8 million, subject to a borrowing base, of which $90.0 million of such capacity is available to us subject to certain restrictions as more fully described below.

Availability under the Asset-Based Revolving Credit Facility is subject to a borrowing base.  The Asset-Based Revolving Credit Facility includes borrowing capacity available for letters of credit (up to $150.0 million, with any such issuance of letters of credit reducing the amount available under the Asset-Based Revolving Credit Facility on a dollar-for-dollar basis) and for borrowings on same-day notice.  The borrowing base is equal to at any time the sum of (a) 90% of the net orderly liquidation value of eligible inventory, net of certain reserves, plus (b) 90% of the amounts owed by credit card processors in respect of eligible credit card accounts constituting proceeds from the sale or disposition of inventory, less certain reserves, plus (c) 100% of segregated cash held in a restricted deposit account. 

Our excess availability could decrease as a result of, among other things, decreases in inventory or increases in outstanding debt (including letters of credit). Our failure to meet the Excess Availability Condition (as defined below) could limit our operational flexibility and growth. To the extent that excess availability is not equal to or greater than the greater of (a) 10% of the lesser of (1) the aggregate revolving commitments and (2) the borrowing base and (b) $50.0 million (the "Excess Availability Condition"), we will be required to maintain a minimum fixed charge coverage ratio. Additional restrictions will apply if the Excess Availability Condition is not met for five consecutive business days, including increased reporting requirements and additional administrative agent control rights over certain of our accounts. These restrictions will continue until the Excess Availability Condition is satisfied and their imposition may limit our operational flexibility. At January 26, 2019, $90.0 million of the aggregate unused commitments under the Asset-Based Revolving Credit Facility is available to us subject to the foregoing restrictions.

The weighted average interest rate on the outstanding borrowings pursuant to the Asset-Based Revolving Credit Facility was 4.57% at January 26, 2019.
 
See Note 6 of the Notes to Condensed Consolidated Financial Statements in Part I — Item 1, which contains a further description of the terms of the Asset-Based Revolving Credit Facility.

Senior Secured Term Loan Facility.  At January 26, 2019, the outstanding balance under the Senior Secured Term Loan Facility was $2,795.5 million.  The principal amount of the loans outstanding is due and payable in full on October 25, 2020.

Depending on our senior secured first lien net leverage ratio (as defined in the credit agreement governing the Senior Secured Term Loan Facility), we could be required to prepay outstanding term loans from a certain portion of our annual excess cash flow (as defined in the credit agreement governing the Senior Secured Term Loan Facility).  Required excess cash flow payments commence at 50% of our annual excess cash flow (which percentage will be reduced to (a) 25% if our senior secured first lien net leverage ratio (as defined in the credit agreement governing the Senior Secured Term Loan Facility) is equal to or less than 4.0 to 1.0 but greater than 3.5 to 1.0 and (b) 0% if our senior secured first lien net leverage ratio is equal to or less than 3.5 to 1.0).  We also must offer to prepay outstanding term loans at 100% of the principal amount to be prepaid, plus accrued and unpaid interest, with the proceeds of certain asset sales and debt issuances, subject to certain exceptions and reinvestment rights.

The interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 5.76% at January 26, 2019.

See Note 6 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1, which contains a further description of the terms of the Senior Secured Term Loan Facility.


57

Cash Pay Notes.  We have outstanding $960.0 million aggregate principal amount of 8.00% Senior Cash Pay Notes. The Cash Pay Notes mature on October 15, 2021.

See Note 6 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1, which contains a further description of the terms of the Cash Pay Notes and Note 14 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 for a description of certain subsidiaries that we have designated as "Unrestricted Subsidiaries" under the indenture governing the Cash Pay Notes.

PIK Toggle Notes.  We have outstanding $658.4 million aggregate principal amount of 8.75%/9.50% Senior PIK Toggle Notes. The PIK Toggle Notes mature on October 15, 2021. Interest on the PIK Toggle Notes is payable semi-annually in arrears on each April 15 and October 15.  Prior to October 2018, interest on the PIK Toggle Notes, subject to certain restrictions, was payable (i) entirely in cash, (ii) entirely by increasing the principal amount of the PIK Toggle Notes by the relevant interest payment amount, or (iii) 50% in Cash Interest and 50% in PIK Interest. Cash Interest on the PIK Toggle Notes accrues at a rate of 8.75% per annum.  PIK Interest on the PIK Toggle Notes accrued at a rate of 9.50% per annum. Interest on the PIK Toggle Notes was paid entirely in cash for the first seven interest payments. We elected to pay the October 2017 and April 2018 interest payments in the form of PIK Interest, which resulted in the issuance of additional PIK Toggle Notes of $28.5 million in October 2017 and $29.9 million in April 2018. We did not elect to pay interest in the form of PIK Interest or partial PIK Interest with respect to the interest payment due in October 2018. All future interest payments are required to be paid in Cash Interest.

See Note 6 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1, which contains a further description of the terms of the PIK Toggle Notes and Note 14 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 for a description of certain subsidiaries that we have designated as "Unrestricted Subsidiaries" under the indenture governing the PIK Toggle Notes.

2028 Debentures.  We have outstanding $125.0 million aggregate principal amount of 7.125% Senior Debentures.  The 2028 Debentures mature on June 1, 2028.

See Note 6 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1, which contains a further description of the terms of the 2028 Debentures.

Interest Rate Swaps. At January 26, 2019, we had outstanding floating rate debt obligations of $3,067.5 million. In April and June of 2016, we entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,400.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness. These swap agreements hedge a portion of our contractual floating rate interest commitments related to our Senior Secured Term Loan Facility from December 2016 to October 2020. As a result of the April 2016 swap agreements, our effective interest rate as to $700.0 million of floating rate indebtedness will be fixed at 4.9120% from December 2016 through October 2020. As a result of the June 2016 swap agreements, our effective interest rate as to an additional $700.0 million of floating rate indebtedness will be fixed at 4.7395% from December 2016 to October 2020. The interest rate swap agreements expire in October 2020.


Non-GAAP Financial Measures
 
To supplement our financial information presented in accordance with generally accepted accounting principles ("GAAP"), we use EBITDA and Adjusted EBITDA to monitor and evaluate the performance of our business and believe the presentation of these measures enhances investors’ ability to analyze trends in our business and evaluate our performance relative to other companies in our industry. We define (i) EBITDA as earnings before interest, taxes, depreciation and amortization and (ii) Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, further adjusted to eliminate the effects of items management does not believe are representative of our ongoing performance. These financial metrics are not presentations made in accordance with GAAP.

EBITDA and Adjusted EBITDA should not be considered as alternatives to operating earnings (loss) or net earnings (loss) as measures of operating performance. In addition, EBITDA and Adjusted EBITDA are not presented as and should not be considered as alternatives to cash flows as measures of liquidity. EBITDA and Adjusted EBITDA have important limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP.
These limitations include the fact that:

•
EBITDA and Adjusted EBITDA:

58

•
exclude certain tax payments that may represent a reduction in cash available to us;
•
in the case of Adjusted EBITDA, exclude certain adjustments for purchase accounting;
•
do not reflect changes in, or cash requirements for, our working capital needs, capital expenditures or contractual commitments;
•
do not reflect our significant interest expense; and
•
do not reflect the cash requirements necessary to service interest or principal payments on our debt.
•
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and
•
other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

In calculating these financial measures, we make certain adjustments that are based on assumptions and estimates that may prove inaccurate. In addition, in the future we may incur expenses similar to those eliminated in this presentation. The following table reconciles net earnings (loss) as reflected in our Condensed Consolidated Statements of Operations prepared in accordance with GAAP to EBITDA and Adjusted EBITDA:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(dollars in millions)
 
January 26,
2019
 
January 27,
2018
 
January 26,
2019
 
January 27,
2018
 
 
 
 
 
 
 
 
 
Net earnings (loss)
 
$
(29.0
)
 
$
372.5

 
$
(57.2
)
 
$
346.3

Income tax benefit
 
(9.8
)
 
(389.6
)
 
(19.6
)
 
(408.5
)
Interest expense, net
 
81.4

 
76.5

 
162.0

 
152.6

Depreciation expense
 
47.8

 
53.4

 
98.5

 
108.7

Amortization of intangible assets and favorable lease commitments
 
23.2

 
24.3

 
46.9

 
49.2

EBITDA
 
$
113.6

 
$
137.2

 
$
230.7

 
$
248.3

EBITDA as a percentage of total revenues
 
8.1
%
 
9.2
%
 
9.2
%
 
9.5
%
 
 
 
 
 
 
 
 
 
Expenses incurred in connection with strategic initiatives
 
9.1

 
1.4

 
16.1

 
1.8

Expenses incurred in connection with openings of new stores / remodels of existing stores
 
5.4

 
1.5

 
10.3

 
2.3

Non-cash rent expense
 
1.9

 
2.1

 
3.8

 
4.4

Non-cash stock compensation and other long-term cash incentives
 
1.5

 
3.7

 
3.6

 
10.1

Expenses and liquidation markdowns related to store closures
 
—

 
12.2

 
—

 
13.5

Expenses related to Cyber-Attack, net of insurance recoveries
 
—

 
—

 
—

 
1.1

Non-cash gain related to change in vacation policy
 
—

 
(7.8
)
 
—

 
(9.0
)
Other expenses
 
2.8

 
4.6

 
5.2

 
4.6

Adjusted EBITDA (1)
 
$
134.4

 
$
154.8

 
$
269.7

 
$
277.2

Adjusted EBITDA as a percentage of total revenues
 
9.6
%
 
10.4
%
 
10.8
%
 
10.7
%
 
 
 
 
 
 
 
 
 
Less: MyTheresa Adjusted EBITDA (1)
 
—

 
7.4

 
(0.9
)
 
9.8

U.S. Adjusted EBITDA
 
$
134.4

 
$
147.5

 
$
270.6

 
$
267.4

U.S. Adjusted EBITDA as a percentage of U.S. revenues
 
9.6
%
 
10.5
%
 
11.1
%
 
11.0
%
 
(1)
Includes Adjusted EBITDA related to our MyTheresa operations of $7.4 million for the second quarter of fiscal year 2018, losses of $0.9 million for year-to-date fiscal 2019 and earnings of $9.8 million for year-to-date fiscal 2018.



59

Critical Accounting Policies
 
The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions about future events.  These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the accompanying Condensed Consolidated Financial Statements.  Our current estimates are subject to change if different assumptions as to the outcome of future events were made.  We evaluate our estimates and assumptions on an ongoing basis and predicate those estimates and assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances.  We make adjustments to our estimates and assumptions when facts and circumstances dictate.  Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates and assumptions we used in preparing the accompanying Condensed Consolidated Financial Statements.

A complete description of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.

Newly Adopted and Recent Accounting Pronouncements

For information with respect to newly adopted and recent accounting pronouncements and the impact of these pronouncements on our Condensed Consolidated Financial Statements, see Note 1 of the Notes to Condensed Consolidated Financial Statements in Part I — Item 1.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We discussed our market risks in Part II — Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018 as filed with the Securities and Exchange Commission on September 18, 2018.  There have been no material changes to this risk since that time.
 

ITEM 4.  CONTROLS AND PROCEDURES
 
a. Disclosure Controls and Procedures.
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation as of January 26, 2019, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act).  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, accumulated, processed, summarized, reported and communicated on a timely basis and within the time periods specified in the Securities and Exchange Commission’s rules and forms.

b. Changes in Internal Control Over Financial Reporting.
 
No change occurred in our internal controls over financial reporting during the quarter ended January 26, 2019 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



60

PART II


ITEM 1.  LEGAL PROCEEDINGS
 
The information contained under the subheadings "Employment, Consumer and Benefits Class Actions Litigation" and "Cyber-Attack Class Actions Litigation" in Note 10 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 is incorporated herein by reference as if fully restated herein.  Note 10 contains forward-looking statements that are subject to the risks and uncertainties discussed in "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements."


ITEM 1A.  RISK FACTORS
 
There have been no material changes to the risk factors described in Part I - Item 1A "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended July 28, 2018 as filed with the Securities and Exchange Commission on September 18, 2018. These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or results of operations.


ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
None.

 
ITEM 4.  MINE SAFETY DISCLOSURES
 
Not applicable.


ITEM 5.  OTHER INFORMATION
 
Not applicable.



61

ITEM 6.  EXHIBITS
Exhibit
 
 
Method of Filing
3.1
 
Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 2013.
 
 
 
 
3.2
 
Incorporated herein by reference to the Company's Current Report on Form 8-K filed on October 29, 2013.
 
 
 
 
10.1

 
Filed herewith.(1)
 
 
 
 
31.1
 
Filed herewith.
 
 
 
 
31.2
 
Filed herewith.
 
 
 
 
32.1
 
Furnished herewith.
 
 
 
 
101.INS
XBRL Instance Document
 
Filed herewith electronically.
 
 
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
Filed herewith electronically.
 
 
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
Filed herewith electronically.
 
 
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
Filed herewith electronically.
 
 
 
 
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
 
Filed herewith electronically.
 
 
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
Filed herewith electronically.

(1) Portions of this exhibit have been omitted pursuant to a request for confidential treatment.


62

SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
NEIMAN MARCUS GROUP LTD LLC
(Registrant) 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ BRANDY RICHARDSON
 
Senior Vice President
 
March 12, 2019
Brandy Richardson
 
and Chief Accounting Officer
 
 
 
 
(on behalf of the registrant and
 
 
 
 
as principal accounting officer)
 
 


63