Saks and Neiman Marcus Merger at the Rumor Stage

According to The Wall Street Journal, high-end department store, Saks Inc. SKS has hired Goldman Sachs Group Inc. GS to look into a possible sale. Neiman Marcus Group Inc., owned by Private-equity firms TPG and Warburg Pincus LLC, is also exploring its options. With two upscale retailers on the prowl, merger rumors are never far behind.

At this stage, a merger between the two titans of luxury merchandising is only speculation. There has been no formal announcement of an “engagement,” much less a “marriage.” However, according to someone familiar with the matter who spoke with The Wall Street Journal, private-equity firm Kohlberg Kravis Roberts & Co. KKR is considering investing in Saks, possibly with an aim toward acting as matchmaker to merge the rival companies.

In the eyes of Neiman Marcus, Saks has always been a lesser competitor. Saks has sales on a much more frequent basis than Neiman, a sure sign of lower status, according to Neiman Marcus. Neiman, of course, has that Christmas catalog with $1 million watches, private concerts by Elton John, and helicopters. Saks has probably never sold a helicopter in its life.

On the other hand, Saks has a presence in New York. Dallas-based Neiman Marcus does not. The fact that these two companies dominate different parts of the country is one thing fueling speculation of a possible merger. Another, according to the Huffington Post, is the possibility a combined Saks/Neiman Marcus entity could be competitive against Nordstrom Inc. JWN and its 117 full-line department stores, versus the 83 stores, total, run by Saks and Neiman Marcus.

Saks and Nieman Marcus have combined annual sales of $7 billion. Nordstrom’s has $11.8 billion and something even more valuable - location. Nordstrom has some of the best prime shopping mall turf in the country. A merger would at least provide Saks and Neiman Marcus the ability to compete with physical store space and through a combined e-commerce businesses, according to Brian Sozzi, CEO and chief equities strategist of Belus Capital Advisors, quoted in the Huffington Post report.

Sozzi said one of the main advantages of a merger would be the opportunity to stimulate growth, and to keep down costs by integrating back-end logistics. Said Sozzi, “It [merger] would create a luxury department store with immediate scale. Both of these companies lack large store bases.”

There are, however, multiple downsides to a merger between the two companies. Steven P. Dennis, founder of retail consulting firm SageBerry said that since Saks and Neiman Marcus have overlapping locations in many malls, deciding which stores to close – and how – would be “complicated and costly.”

Dennis also said brand management could be a problem. Both Saks and Neiman Marcus are well-known to their respective customer bases. Eliminating one brand in favor of another isn’t a viable option. According to Dennis, “… the challenge would be to reposition one to maximize the market opportunity. Not an easy task.”

At the time of this writing, Jim Probasco had no position in any mentioned securities.