Neiman Marcus Opens Customer Door Wider

By RACHEL DODES

With its extravagant Christmas catalog and the wealthiest customer base in American retailing, Neiman Marcus Group has, for more than a century, earned its snob appeal.

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But after a recession that cost the company $1 billion in annual revenue, the new chief executive officer, Karen Katz, is on a mission to make the chain a bit more inclusive.

"We need to attract more customers into Neiman Marcus," said the 53-year-old Ms. Katz, a former handbag buyer who rose through the ranks over the past 25 years to become chief executive Oct. 6. "That's different than the way we used to think of things."

The new thinking is on display at New York Fashion Week, which runs through Thursday. For most design houses, Ms. Katz and her merchant team carry the biggest wallet at the shows. The Neiman Marcus team will be seeking out looks that are accessible from both a style and price perspective.

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The goal is to bring younger shoppers "into the fold," says Karen Katz, CEO, shown in a 2009 photo.

"We recognize that there's a customer we want to appeal to that might not be at the top echelon of what we offer," said Ken Downing, Neiman Marcus's senior vice president and fashion director.

As he and the Neiman team left Carolina Herrera's fashion show on Monday morning, Mr. Downing said he was excited by all the color on the runway, particularly at shows like Ms. Herrera's and in the collections of younger designers like Jason Wu and Prabal Gurung.

In addition to ordering from designers like Michael Kors and Ms. Herrera, Neiman merchants will also focus on fall gear from contemporary brands like Theory, which recently appointed the acclaimed couturier Olivier Theyskens as creative director. The retailer also picked up a new line by the Hollywood stylist Rachel Zoe, which will debut next fall.

For the first time, Neiman buyers this season will be accompanied at some shows by Jean Scheidnes, who recently joined the company as "managing editor, social media," a new position. She will be Tweeting, posting on Facebook and writing for the new NM Daily blog, which the retailer launched this week.

The moves are all part of Ms. Katz's effort to tone down the ultra-rich image to capture younger and less affluent luxury customers. Neiman Marcus boosted its assortment of lower-priced merchandise over the past 18 months and is telling sales staff, long trained to up-sell, to show shoppers less expensive items as well. Most of its new store openings will be Last Call clearance outlets.

Neiman Marcus has seen improved trends through 2010 and into 2011, posting 9.8% sales growth in January for stores open for at least a year. It was Neiman's 14th consecutive month of positive results after a year and a half of declines.

That gain was sharper than those of luxury rivals Saks Inc. and Nordstrom Inc., which posted increases of 4.4% and 4.8%, respectively for January. But Neiman's January sales were still 7.8% below where they were in January 2009.

For the past decade, Neiman had focused on the 100,000 or so people who spend at least $12,000 a year at its stores, accounting for almost half of its sales. That lack of customer diversity has cost Neiman.

While luxury was one of the strongest segments for retailers this past Christmas—sales were up 6.7% after a flat 2009, according to MasterCard SpendingPulse, which tracks retail sales—wealthy customers still aren't shopping the way they used to. Meanwhile, "aspirational" shoppers with a net worth below $1 million defected to less exclusive competitors.

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Retailers across the spectrum have had to adjust. Nordstrom lowered its average prices by some 10% in the throes of the recession by adding less expensive brands. Further down the ladder, Macy's Inc. has also cut its average prices in many locations in a bid to grab market share from J.C. Penney Co. and Kohl's Corp.

Neiman's owners—private-equity groups TPG and Warburg Pincus— have a lot riding on Ms. Katz. Five years ago they paid $5.1 billion, nine times Neiman's cash flow, to win a bidding war for the retailer. Last year, the company wrote off more than $700 million in the value of its brands. Both private-equity firms say they plan to hold on to Neiman for as long as necessary.

"If we do our job, and Karen does her job, that gives us the opportunity to say, 'Let's think of this exit, or this IPO,'" said Kewsong Lee, a managing director at Warburg Pincus who sits on Neiman's board.

Dressed in a black alligator J. Mendel jacket, a black skirt and Givenchy boots, Ms. Katz pointed out her new strategy at the downtown Dallas store. The jewelry department, once dominated by gold and prices that reached up into the thousands, now features new vendors such as Ashley Pittman, who makes baubles costing less than $600 out of materials like brass and wood. Shoes by Stuart Weitzman, a designer known for pumps under $300, are now in all 41 Neiman Marcus stores, up from 25 prior to the recession.

Ms. Katz "recognized that the preferences of her core luxury customer were evolving," said Ermenegildo Zegna, CEO of high-end Italian menswear maker Ermenegildo Zegna. Neiman is now carrying Z Zegna, a collection targeting men aged 25 to 40, in 11 stores that previously carried only Zegna's core brand. Suits in the Z Zegna line have a tighter fit and sell for under $2,000, significantly less than the main line.

For years, Neiman capitalized on customers' seemingly insatiable appetite for luxury. From 2003 through 2007, revenue climbed 50%, with sales hitting a historic high of $650 per square foot, according to Fitch Ratings, a credit rating firm. Yet internal studies showed the bulk of the gains were being driven by price increases, particularly on shoes and handbags. The number of transactions and customers was declining.

Ms. Katz's predecessor, Burt Tansky, didn't see the situation as a problem, people close to him say. He often joked that his dream was to have five customers, each of whom spent $1 billion a year. When board members suggested adding lower-priced goods to help lure back shoppers during the 2008 financial crisis, Mr. Tansky initially rejected the idea.

"We will never trade down," he told the board, according to people familiar with the matter. Mr. Tansky, who is now chairman, declined to comment.

The company slashed spending, cut orders by as much as 40% and staffing by around 20%. But with sales continuing to fall—they plunged more than 30% in December 2008—the board insisted the merchandise assortment had to change.

"We said, 'Burt, the world is a different place now,'" said Warburg Pincus's Mr. Lee. Mr. Tansky eventually agreed, Mr. Lee said.

Ms. Katz believed that lowering prices, or "rebalancing," didn't mean abandoning cachet. The company, she said, is committed to carrying the highest-end merchandise while broadening its offerings at entry-level prices, expanding new off-price store concepts and introducing online limited-time "flash sales."

At a November meeting, Ms. Katz discussed the importance of wooing younger shoppers with new tools like an iPad app and a website for the off-price Last Call division.

The goal is to bring younger shoppers "into the fold and move them up as their income rises," Ms. Katz said.

Write to Rachel Dodes at rachel.dodes@wsj.com