The Bricks-and-mortar Ruling the Saks Global Bankruptcy

There was a lot of talk about the death of the department store as Saks Global limped along last year and then finally collapsed into insolvency late Tuesday. 

True, stores have had to adapt to all things digital and they are still finding their place in the new consumer landscape. 

Even so, at the very heart of Saks Global’s bankruptcy case is a ton of bricks-and-mortar. 

Call it a parable for modern retail. 

Bondholders and Amazon alike have sought to claim the famous Saks Fifth Avenue flagship in Manhattan even after it has been steadily sold off in pieces over the years.

Witness retail veteran Arthur Martinez, who served as Saks’ chief financial officer from 1980 to 1987. He told WWD in a 2018 interview that: “The problem with Saks is we sold the air rights to Swiss Bank and they built a tower right behind the store. You can no longer build on top. The air rights are gone.”

But the flagship was still the crown jewel when Richard Baker’s Hudson’s Bay Co. bought the chain in 2013 for $2.9 billion. 

A year later, the flagship was appraised at $3.7 billion as the always real estate savvy Baker took out a $1.25 billion, 20-year mortgage on the ground beneath the store.

“This valuation…seems to indicate that it’s the single most valuable retail building in the world that we know of,” Baker crowed at the time. 

The price tag was viewed with some skepticism at the time. But still — even with the ground below the flagship and the air above it sold off — there was enough value there to tempt almost anybody. 

It’s not clear for what the building has been appraised at more recently or what it would actually sell for, but the flagship is still at the center of the action, either as a store or just a source of value. 

When Baker moved to buy Neiman Marcus Group, the company sold $2.2 billion in bonds bearing 11 percent interest. Saks Global was lucky — or unlucky maybe — and caught a sweet spot in the bond market in December 2024, when Wall Street was jazzed by a second term with President Donald Trump.

Somehow — against all reason, but confirmed by participants — bond investors only guessed that their “senior secured” debt was directly secured by the flagship.

It was not, a close reading of the documentation confirmed once somebody bothered to look. 

That caused an implosion in Saks Global’s bond prices last spring that didn’t settle down until that debt was refinanced in August and $600 million more was added on. 

But here, that sinking feeling starts to get worse as debt gets piled on top of debt and the promises pile up.

Amazon, which had a partnership with Saks Global, had the right to sign off on any financing and didn’t give its consent to the August deal. To make things right, Saks Global gave it “recourse to the purported ‘equity cushion’ in [its] iconic, Fifth Avenue flagship,” according to court filings from Amazon.

But this week, Saks Global used the flagship to secure part of the $1.75 billion financing package meant to see it through the Chapter 11 process and beyond. 

That caused a last-minute rush in bankruptcy court on Wednesday. 

Amazon pushed to delay approval of the DIP deal to keep its interests in the flagship from going to bondholders. And Saks Global argued that, without the ability to borrow against the flagship, there would be no DIP financing and the next step was liquidation, leaving the fate of the company hanging on a late-night court hearing.

Alfredo Perez, the federal bankruptcy judge in Houston overseeing the case, agreed and signed off on the financing. 

Saks Global lives on to fight another day — for now. 

Amazon was being buzzed about as a potential savior of Saks Global just last week, with rumors flying Baker had met with founder Jeff Bezos, and so on. But the talk seems to have been at least mostly talk and a source in a position to know said there was no meeting. 

Certainly, Amazon and Saks Global are not cozy like they were. 

Saks Global plans to use the bankruptcy court to cancel its agreement with the web giant, having promised Amazon $900 million in fees over eight years. 

And the e-commerce platform has taken its gloves off.

“Amazon reserves its rights to pursue all claims arising from the company’s and its management’s misconduct related to [its agreement with Saks Global], in addition to claims arising from the board and management’s conduct in the last year that has led to the degradation of significant value and left the company in such a precarious financial position,” the web giant warned the retailer last week. 

There’s a certain deliciousness to Amazon and Saks Global fighting it out over a brick-and-mortar store when the retailer, in a bid to become more like Amazon, doubled down on e-commerce. 

In the heyday of the pandemic buy-from-home rush, Baker split the e-commerce and retail businesses of both Saks and Saks Off 5th with a series of complicated operating agreements. 

Saks was reintegrated when the company bought Neiman’s, but the separately managed Off 5th stayed in two parts. 

Now, the digital off-price luxe concept does not seem long for this world. 

Andrew D.J. Hede, chief restructuring officer of Saks Off 5th Holdings, told the bankruptcy court that: “The separation of the e-commerce business was intended to attract specialized talent focusing on technology, as well as new capital seeking out higher growth and returns.

“The SO5 Digital Debtors made substantial investments in the infrastructure to operate an e-commerce business, and additionally incurred substantial expenses towards digital marketing, for example, which have not led to the anticipated return on investment,” he said. 

Hede said the Off 5th digital debtors “intend to conduct an orderly sale process to maximize value for stakeholders. Based on preliminary market feedback and the operational structure of the business, the SO5 Digital Debtors believe an inventory monetization strategy is most likely to optimize recoveries.” 

This “self-liquidation” applies solely to saksoff5th.com and not the brick-and-mortar stores, he said. 

Oftentimes, real estate and retail are talked about like their different businesses, but really, the two make money together. 

The stores, run well, produce cash that can be put into the property, which in turn is a source of value that can be borrowed against or used as a safety net in lean times. 

Look at Dillard’s Inc., a retailer that is decidedly less sexy than Saks or Neiman’s or Bergdorf’s, but never got too fancy with its real estate or sold it off. The retailer is currently worth $10 billion.

Neil Saunders, managing director of GlobalData, put it well in his comment on the Saks Global bankruptcy. 

“Ultimately, the lesson from Saks is that retailers should be run as retailers and not used as financial playthings,” he said.

The Bottom Line is a business analysis column written by Evan Clark, deputy managing editor, who has covered the fashion industry since 2000.