Why Barneys is a stretch for Holts

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Last year, Caryn Lerner, the chief executive officer of Holt Renfrew & Co., denied that she was interested in the top job at Barneys New York, and now comes a tantalizing explanation: She may have her eye on the whole company.

Holts, the storied high-end Canadian retailer, has approached Perry Capital LLC, the New York-based hedge fund that helped finance the $942.3-million (U.S.) takeover of Barneys by a Dubai firm in 2007, about acquiring the ailing luxury chain, according to a report by Bloomberg News.

A Holt Renfrew spokeswoman said the company would have no comment, and Michael Neus, the general counsel of Perry Capital, did not return a phone call requesting comment. Management at Istithmar World PJSC, the investment arm of the Dubai World conglomerate, a state-owned firm, responded to the reports by affirming its commitment to Barneys.

But the company faces some steep odds for success: The luxury retail sector is in freefall and Barneys, which has had a rocky decade, is in an especially perilous position.

Last spring, Istithmar was forced to extend $25-million to Barneys to calm the nerves of suppliers who had suggested they might not ship goods for the season. Moody's cut the retailer's debt rating in July two notches to Caa3, which indicates a high risk of default; the same month, its long-time chief financial officer departed. And last month, Istithmar hired New York's Perella Weinberg Partners to advise it on restructuring $500-million in debt related to Barneys. Perry Capital is Istithmar's largest bond holder.

Adding to the tumult, Barneys has been without a CEO since Howard Socol, the retail veteran who helped steer the company out of bankruptcy protection in the 1990s, resigned in May, 2008, amid reports he did not support Istithmar's decision to pursue aggressive global expansion.

Barneys, which has nine department stores, 13 outlets and 19 smaller Co-Op stores aimed at slightly younger consumers, has never been just another luxury chain. In New York, where it originated more than 85 years ago, it is a favourite of fashionistas on the prowl for cutting-edge clothing who normally might disdain a department store. Its flamboyant Christmas windows are often more like art world happenings than retail displays; one year, they featured writer David Rakoff dressed as Sigmund Freud, smoking a pipe and nodding thoughtfully.

Last year, Barneys was the U.S. distributor of Kate Moss Topshop, the new fashion line created by the British model. Its fare includes designers like Proenza Schouler and $300 jeans that look as if they were put through a wheat thresher on their way to the racks.

But that proved a high-risk strategy, as customers who are passionate about fashion can also be exceedingly fickle when they decide once-hot labels have had their time at the top.

"Any time you go to higher-fashion merchandise, you increase your risk," said Howard Davidowitz, a New York retail consultant and investment banker.

The highly leveraged nature of Barneys has made it difficult for the chain to compete.

Mr. Davidowitz, who is chairman of Davidowitz & Associates Inc., said the marriage of Holt Renfrew with Barneys could be beneficial, as long as the Canadian retailer goes in with its eyes wide open.

"It's a massacre out there," he said, referring to the luxury sector. "It's smart that [Perry]is teaming up with an operator, because at the end of the day, what's needed here is real retail luxury expertise." He noted that not all high-end retailers have suffered equally.

"If you look at Hermès, earnings are only down 7 per cent." Still, he added that the entire sector is facing permanent shrinkage. "I don't think luxury is going to be what it was."