Why department stores aren't dead yet: Exemplar Luxury Group CEO

What has surprised you recently about the US luxury shopper?

I think what surprised me is how many customers are entering luxury. About 1/3 of our customers are millennials and Gen Z.

I thought millennials had no money. How are they going to Saks and Diva Marcus?All right. Welcome to a new episode of Power Players. Uh, we're gonna go inside all things luxury. Jaf, good to see you. Exemplar luxury Group now.

Great to see you and great to represent Exemplarury Group.

I have not seen you in almost 4 years. Like you were, you've been the CEO of Neiman Marcus. Now you're leading like this, these iconic brands, Neiman Marcus and what, and Sachs. Tell us a little bit about what this.Exemplar is all about.

Well, Exemplar luxury Group is really the collective of three incredible banners, Neiman Marcus, Saks Fifth Avenue, and Bergdorf Gutman. Each of the three has more than 100 years of storied history. Bergdorf just celebrated his 1 25th anniversary this year. And so this is the collective way we bring the pinnacle of luxury, the access to the luxury customer in the US under one umbrella. But what's really important is thatThey each have a distinct personality. Behind it is a shared set of capabilities, a shared belief in relationship, and a shared set of economics, and we've really been able to create a structure that has much less cost and much more learning and synergies across the banners.

Whatbrought you back to lead this combined company and what was it like getting out of that, what that bankruptcy process?

Well, what brought me back is really the belief thatThese 3 banners have a role to play. And what happened to them is that when the merger happened, it was not funded with enough liquidity. The liquidity led to payment delay. The payment delay led to brands not having trust to ship, and then ultimately you get in a deadlock where the business doesn't generate any more cash.

It

really is. And so that's what led us to a chapter 11. The chapter 11 is a chance for a brand new day.And that's the moment that I came back with three of my former colleagues with a strong belief that with the team that was in place and with the relationship we had with the brands, we could go through a financial restructuring. On the other side of the financial restructuring, we know a company that has $900 million of gross liquidity.A company that has very low interest payments to make over the next two years. We have half a billion of term loan that is peaked, so we don't have a cash outflow on the interest. We have an ABL that has about 340 million at the end of Q2, and that's about $18 million of interest payment, and we took away $300 million of fixed costs using the tools available in the bankruptcy. And so it's a brand new day because we are fully integrated. We have the right capital structure.Very sustainable interest payment and a cost structure that is much, muchbetter.

This is like a rebirth of 100 plus year old companies.

It is a rebirth and it's a rebirth, not for the sake of survival, but for the sake of transformation. Our aspiration is really to be the leader in the relationship business and I think we, we have now what used to be competing entities together. There's a real opportunity to create one culture, but to take theBest of all the different banners and the different people internally.

How many stores are open now?

We have 49 stores as a collective and then there are full price stores and then we kept 12 off-price stores to be a liquidation channel.

But you're largely out of the off-price business. Those days are done, and look, honestly, I would walk into what Saks off 5th and I would find nothing. Like 100% and it's not your fault, but I would find nothing.

It's a business that I think is not synergistic with who we are. We are.We are about luxury. That business is different and it also operates at scale and with a different set of econ economics. And so the business we realized was not profitable. It consumed cash, it consumed inventory, it consumed effort. We've shrunk it to 12 stores. Neiman Marcus Group had 5, so we know that that model works, that it's enough to have a liquidation channel because you always have at the end of the season out of 49 stores, some inventory that is seasonal that needs to be in a different channel.But it's not a business go forward and it's one of the many decisions we made during the bankruptcy to refocus the business on luxury. We had so much activities that were linked to real estate development. We were paying 55 million of rent on stores that were closed with the hope that we would monetize the Lord and Taylor, Lord and Taylor. And so that, that consumed a lot of effort, a lot of the cash that at the end of the day, the consumer doesn't benefit from.And my focus, our focus is really to be the leader in luxury and not, not in other elements.

You, so you ran Neil Marcus. When you've got to look inside the inner workings, the structure of Sacks, how far behind were they in terms of Neo Marcus?

Two different strategies, the Neiman Marcus Group with Bergdorf and Niemann were very focused on a relationship, Building a relationship, having loyal customers who really enjoyed the shopping in an omni-channel way, but very geared towards a relationship with a sales associate. Sachs had a different strategy of faster growth, more transaction, and more digital. That model was successful in driving the growth but was not successful in driving the same profitability.There is a blend of both because what we want is a relationship business. We want to focus on getting to know the customers, serving them.There are real strengths that Sacks developed in the online business that are fully applicable to the entire ecosystem. Online is important. It's a way for us to recruit customers, but the business model from an economic standpoint and from a consumer preference is really migrate them to be omni and ultimately to be in a relationship with a sales associate.

So let'sgo brand by brand. Let's just start with Sachs, we're talking about that. How do you reinventSacks for today.

The first thing we did is looking at the store footprint and we selected 15 stores that are in markets where the business is profitable, where the store is large, and where there's a lot of consumer demand. And so right sizing the footprint is one way to start on a strong foundation. All of the Saks stores are profitable as of the end of May this year on a forward basis, and then it's really playing on the strength of the Saks brand.And the type of customers that Sachs has. Sachs has a customer who wants to express himself or herself through fashion.And goes to Saks to find the fashion, to find the inspiration, and to find the confidence to buy that outfit and express themselves that way. There's 7 SAs that are in the same market as the Neiman Marcus, and that is a good thing. This means that there's markets where both can coexist and where there's enough demand. So you see them coexisting. We completely see them coexisting.And the the best statistics there is in these 7 markets, where they're in the same mall, a mall across the street or in Beverly Hills on the same side of the crosswalk, there's less than 15% overlap in number of customers between Sachs and Niemann. And so today, as they are, the consumer feel and relates to them differently. Not that we own them all, the goal is to accentuate.That differentiation, knowing that behind the scenes they share the same DCs or for Sachs and Niemann the same merchant team and the ability to share inventory, but we really want to separate them. And so Sachs has a real strength in specific geographies with a consumer that really likes the association with New York.

Letme just look at it this way. Does the bi-levelDepartment stores still make economic sense, having 2 floors or 3 floors, or do you see this eventually going 1 floor, amazing luxury experience, get in and out.

You know, I think what consumers who shop in multi-brand retail, the main driver is to be in a place where they can build a relationship with someone who's going to find what's right for them. They're there for the discovery, discovering products that they haven't seen because it's a new season. They're there for the discovery of discovering a brand that they don't know, and they're there for the outfitting. And I think what really differentiates ourselves is that we are there to help you build the outfit for your season.Very few people dress themselves head to toe with one brand, and so the discovery could be on one floor, it could be on multiple floors, on the 7th floor with a basement that makes an 8th floor. I'd be hard pressed to remove any of the floors. And so I think it's more about.Creating enough density of newness and creating enough experiences because that's really what the consumer is looking for is experience as much as they're looking for the product and the shopping experience is one of them, but a lot of the services are equally important.

How do you see that evolving? Because I think you've seen some of your competitors dabble in this, you know, they put a restaurant on the bottom floor. I mean how do you think about reinventing, like how do you keep these folks in the?

The services really play a very big role in the experiences. So at Neiman Marcus we have about 40 restaurants. They drive an incredible amount of traffic and an amount of time. Bergdorf has a restaurant and we see that about 20% of the customers have an experience and dine with us. And so it is really meaningful because the association with us goes beyond.The product, it's about spending time with us. It's about experiencing our lifestyle, it's experiencing the cooking that we do and the tradition we have specifically at Neiman Marcus. And so to me, creating moments of experiences with restaurants, with cafes, with bars, adding categories such as home epicure and all the beauty services, we, we, you don't see it when you go in a store, but most stores have multiple aestheticians, multiple spa rooms that are complementary and really create a.Opportunity for us to connect on a human basis with the customers.

Yes, I missed that memo. I didn't see that.

You should try it in most of our stores, and I think it's, it's really interesting because it's all about creating a human connection and I think to me that is what our customers are looking, but it's also the moment where we connect with them. We know that when a customer is in a relationship with a sales associate and we define that.Simply as shopping 3 times with the same sales associate, they spend 16 times what a customer who's not in a relationship. But the better way to look at that is that consumer who meets someone, who advises them authentically, really become loyal and become so delighted that they spend 16 times and if they don't meet that person. So that, that experience, that human connection is what we need to continue to do and amplify.And then part of what the years to come are is to innovate and figure out how do we bring technology in that but still at the service of the human.

Isn't that what retail is missing? What do they say, you know this better than me, retail is detail. They always said that. But when I walk into a lot of stores right now, there's no humans. Look, I, I, I'll be, I walk into Macy's, I can't find anybody to help me. And isn't that the biggest problem right now?

I think that the human interaction to me in a relationship business, and I can only speak about.Our business model, but our business model is about building a relationship, and that is always going to be with a human. And so when we look at our staff, we really want them to have a lot of the friction taken away and technology can help about what size do we have, how do we find a shoe faster.So that they can spend their time building that connection with the customer. Our view is that we want our sales associates to be superhuman, but the technology will be very much at the service of the human because I think that's what makes us last forever and that's what makes us different is building that relationship with the customer. That's sticky.

So new corporate name, you have all these iconic brands under this roof. Have you had to retrainEmployees,

so I would say that this organization has enormous resilience. If you look at what it went through a merger, a moment of challenging conversation because we didn't have inventory, we were selling what you have, and then Chapter 11 where we took a lot of decisions and executed on.So we closed doors, we narrowed 7 DCs to 3 logistics centers. This organization is resilient and knows how to deliver. I think at the heart of it, this organization loves what they do. And so this is a new day where we celebrate that we have.The means to operate and it's about galvanizing our team to do what they like to do best, which is serving the customers, some of them in the front line, many of us supporting them and being servant leaders at their service, and so we are re-establishing, and that's part of changing the name, a culture where it's about customer devotion. It's about building and celebrating the relationship with the customer, with the brand partners, and igniting all of that. We just hire a new chief people officer because to me,We need to be an employer of choice. We need to create that value proposition, and that's at the service of the customer.

Three brands, where are you spending most of your time?

Across the board because they each are important in different ways.And frankly right now I spend a lot of my time with the brands. We spend time doing the bankruptcy, reassuring everyone, making sure that we uh brought them with us. If I look at the top 200 brands that we had pre-petition, they're all doing business with us today, and that's about 90% of our GMP.

How do youregain that trust?

I think one is you, you bring the credibility that of having run a business profitably and having gone through a chapter 11 where what you say is what you do and what you do is what you say. So I think coming back with a team of trusted people was a key factor.Our shareholders invested 600 million that went back to the the brands in terms of critical payment or payment of past dues. So there was an element of we need to make due and help all brands limit the loss. And then it's really about, we are the gateway to the US customers. So my time right now is with the brands developing 3 year plan of growth. When I look at the brands, the majority of the customers that they access to us are new to their brand.If you look at our top 20 brands, the number of our most valuable customers who shop them is between 10 to 50%. And so there's so much customers, like 40% of our sales come from customers who spend $36,000 on average with us $6000 a year. So we have that wealth of customers.The brands want to access these, and yet many of the most desirable brands have 10, 20% of those most valuable customers shopping with them. So my time right now is with the brands on how do we expand your distribution, how do we create a microtargeted activations, how do we do more broadcasting because we have 700 million visits on our three digital properties.And and it is really across the banners and then specific to what the brand or the banter needs.

Within that 3 year roadmap, does that include opening up new locations?

I think the footprint we have.is a really good footprint and we spend a lot of time thinking about it. There are some cities where we would consider if there was a good property to open a store, but I think at the end of the day our footprint is what it is, plus or minus 2 or 3 over the next 3 years because the footprint we have is really.In the right locations where the luxury consumer is, and we believe that the play is about driving productivity more so than expanding further the reach.

With all the website visits you get, all the traffic to your locations, what has surprised you recently about the US luxuryshopper?

I think what surprised me isHow many customers are entering luxury. We're seeing younger customers as the wealth transferred to the millennials. We're seeing customers who are generating wealth in different sectors and they're coming in luxury and we're seeing them with us. About a third of our customers are millennials and Gen Z in the number of customers. And so that's really encouraging what we're seeing them.Is by across all categories and really resonating with the brands that offer newness and have a newness that is congruent to their brand DNA and so I see this market as very resilient. So I feel very confident in the luxury consumer. We need to be very humble, very cautious. We have a 5 year plan.A stabilization. We're going into the holiday with the right inventory, but it's still about stabilization and being very cautious and intentional.

I thought millennials had no money. How are they going to sacks and Marcus?

I think the level of wealth transfer, I think the level of people investing in the market, I think the level of people being involved in technology, that that really has driven that demographic to be more inclined.And then it is a little bit of a one-way street. Once you explore and engage in luxury. The flavor of it is really there. So, uh we we are seeing that that that that interest uh increasing.

Is the international shopper still a big component of your sales, especially at the flagship locations?

I thinkall business is mostly a domestic business.And a business that is with the locals. So we really know our communities, we're involved in our communities. Obviously in the big cities and the coast, we see tourists and that's part of our customer base, but we are very much catering to people who live, have an address in the US and who come back to us on a multiple and regular basis.

Was itHard to come back for you personally to do thisjob?

Well, I was very fortunate that I had a year of sabbatical where I was able to make investment in new technologies, explore and do some board service. So it was very rewarding.Coming back to an organization that has such a great purpose and with the wealth of wisdom that I have and experience was actually like getting back on a bike or putting your skis back on and going.

You're like the reborn CEO. I mean, I mean that in a positive sense.

It's been incredible to have a chance to do a job that you know how to do, but with stepping back and having distance and at the end of the day.A lot of what we need to do is learn from more strength, learn for more mistakes, and so we're making very agile decision, very fast decision. I think that's based on the fact that this team knows each other relatively well. It's a blend of Saxon and Niemann and Bergdorf, but the, the confidence in we know we've run a business that was profitable, we've run a business that was growing, I think that that is really great to have a chance to play a second time.

Areyou planning for a big holiday season?

We are planning for a very delightful holiday season. So we have a lot of activation in place with unique collections, early launches, the, the light show at Saks, the fantasy gifts at Niemann, the windows at Bergdorf. So it will be a joyful holiday. It'll be one where the customers are going to feel very delighted.

To the doomsayers that say all malls will be out of business in 10 years, what do you say to them?

I think that in the future.When you look at true luxury, which is buying a product that comes from a brand that has a history, a product that has a texture, a product that is fashion, so there's a newness, I think that human interaction, I think that experience is going to be something that the luxury customer is going to continue to want to have. And where we are seeing disproportionate growth for us, it's in the store whereWe are seeing this proportionate growth. It's with our top sellers. We have 1500 top sellers who sell more than a million each. In aggregate, they sell 2.9 million, and they're really in relationship with those clients that they know so well. That is not going away. I think where we can increase the stickiness is really powering.All humans with more data, with more recommendations so that every one of their customers feels that the white glove service that our best customers are receiving and we want to scale that white glove service, but I completely see that still being a one on one interaction, still being a physical interaction and a personal interaction.

You spentdecades in luxury retail. Why? What got you into this space?

What got me into the space is this blend of art and science. What's magical about luxury is it's about emotions. We're selling something that has texture, something that has layers, because the brand evokes something in your mind. It's not something you need, it's something you desperately want.To me, we're selling beauty and it is also a science because we need to operate with a lot of discipline. We need to create those those magical moments and that means that we need to motivate, we need to empower our teams, we need to reward them, hold them accountable. I love that blend and I think at the end of the day.I'm a customer devotee. During our chapter 11, we made a lot of decisions and the one criteria was always where, where did the customer vote? Where, what is best for the customer, and to me, that is a great religion to have, uh, and it's one that as you run a business.You can unite the whole team behind it and that makes all the difference.

Throughout your rise through luxury retail leadership positions, is there someone that has helped you better understand this retail science, a mentor, someone that has invested time into you that you continue to be in contact with today?

So there's a lot of people. I was very fortunate to have a lot of people whoTook the time to educate me, to invest in me, and to empower me. One comes to mind. It's Yves Carcel, who was the chairman of Louis Vuitton.And Yve really took Vuitton from $400 million to a multi-billion dollar business and what Yves had was a magic of touching individual people. We would be on the plane and at the time they were magazines. He would rip the page of the magazine and then write a little note and or you'd get an email saying, I just thought of you, read this. He would call all the store managers when we would open a store or renovate a store, and to me what I learned is really.It is the human touch. We do that for our customers. It's so easy not to do it for our teams. And once you realize that, you dedicate time to that, and I typically write 5 thank you notes every morning, that is my workout routine. It gives me all the energy to be grateful to my team and in return I just realized, oh my God, this team is incredible. They are at the service of the customers. So that was to me what.taught me about luxury is that luxury is one person at a time and it starts with all people and being grateful is the best way to exude generosity forcustomers.

I agree with you, and those are very good words of wisdom. Uh, Jafar, good to see you. It's been a while. Don't be a stranger, will you? Great

seeing you and please invite me again. I have a lot of thingsto say.

You're more than welcome. We'll continue along in that 3 to 5 year plan, uh, together. Thank you so much. I appreciate it. Thank you so much. All right, that's it for the latest episode of Power Players.