Fitch Affirms Neiman Marcus' IDR at 'B'; Outlook Stable.

NEW YORK -- Fitch Ratings has affirmed its ratings on Neiman Marcus, Inc. and its subsidiary, The Neiman Marcus Group, Inc. (NMG), as follows:

Neiman Marcus, Inc.

--Issuer Default Rating (IDR) 'B'.

The Neiman Marcus Group, Inc.

--IDR 'B';

--Secured revolving credit facility 'BB/RR1';

--Secured term loan facility 'BB-/RR2';

--Secured debentures 'BB-/RR2';

--Senior unsecured notes 'B-/RR5';

--Senior subordinated notes 'CCC+/RR6'.

The Rating Outlook is Stable. The company had $3.0 billion of debt outstanding as of April 26, 2008.

The ratings reflect NMG's leadership position within the luxury retail segment, with strong sales productivity and operating metrics and debt reduction since the company's leveraged buyout (LBO). This is balanced against the weak economic and market conditions which has led to the recent deceleration in sales and margins. Fitch expects credit metrics could weaken somewhat over the intermediate term on continued top line softness.

NMG is the country's premier luxury department store chain, with latest twelve month (LTM) revenue of $4.6 billion. Over 70% of its revenue is generated from its 40 full-line Neiman Marcus stores and 24 clearance centers, while its two Bergdorf Goodman stores in New York contribute over $500 million in sales or 12% of total revenue. In total, the retail business accounts for 84% of revenues and 81% of operating income and the remainder comes from its direct internet and catalog businesses. NMG retail stores are highly productive and the company's sales per square foot at $638 are well ahead of its two closest peers. A consistent focus on its luxury customer through sales associate relationships and narrowly distributed brands has driven strong loyalty and NMG has generally outperformed its luxury retail peers on comparable store sales growth over the past few years.

Since its LBO by Texas Pacific Group and Warburg Pincus in October 2005, NMG has repaid $350 million of its $1.975 billion term loan with free cash flow and asset sales proceeds. EBITDA has increased to $690 million for the LTM period ended April 26, 2008 from $543 million in fiscal 2006 (ending July 29, 2006). As a result, adjusted debt/EBITDAR has declined to 4.7 times (x) from 6.1x over the same period. In addition, leverage based on an adjusted debt/EBITDA basis has declined to 4.3x, below management's targeted level of 4.5x.

However, given the current retail environment and the company's desire to preserve liquidity, credit metrics are anticipated to weaken somewhat in fiscal 2009 on reduced margins and limited debt paydown. NMG's comparable store sales turned modestly negative in February 2008. Luxury spending typically varies with swings in asset values and business profitability and aspirational spending tends to fall away with an economic downturn. As a result, gross margins have been pressured due to a lower mix of full-priced selling and increased markdown to clear excess inventory.

The ratings of the various classes of debt listed above reflect their respective recovery prospects. Fitch's recovery analysis assumes an enterprise value of $2.4 billion in a distressed scenario. Applying this value across the capital structure results in outstanding recovery prospects (over 90%) for the $600 million revolving credit facility, which has a first lien on inventories and receivables. The $1.625 billion term loan and the $121 million of secured debentures are secured by a first lien on the company's fixed and intangible assets, and have superior recovery prospects (70%-90%). The $700 million of senior unsecured notes have below average recovery prospects (10%-30%) and the senior subordinated notes have poor recovery prospects (less than 10%).

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.