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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission file no. 1-9659

The Neiman Marcus Group, Inc.
(Exact name of registrant as specified in its charter)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ý                NO o

As of November 30, 2002, the number of outstanding shares of each of the issuer's classes of common stock was:

THE NEIMAN MARCUS GROUP, INC.

INDEX

THE NEIMAN MARCUS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements.

1

THE NEIMAN MARCUS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements.

2

THE NEIMAN MARCUS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements.

3

THE NEIMAN MARCUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

        The Condensed Consolidated Financial Statements of The Neiman Marcus Group, Inc. and subsidiaries (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted for complete financial statements. Therefore, the financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended August 3, 2002.

        In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments (as well as a change in accounting principle as more fully described in Note 3), necessary to present fairly the financial position, results of operations and cash flows of the Company for the applicable interim periods. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year as a whole.

        The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the condensed consolidated financial statements.

        Since future events and their effects cannot be determined with absolute certainty, actual results will differ from those estimates. The amounts currently estimated by the Company are subject to change if different assumptions as to the outcome of future events were made. The Company evaluates its estimates and judgments on an ongoing basis and predicates those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Management makes adjustments to its assumptions and judgments when facts and circumstances dictate.

        Management of the Company believes the following critical accounting policies, among others, encompass the more significant judgments and estimates used in preparation of its financial statements:

•

Revenue recognition;



•

Valuation of merchandise inventories, including determination of original retail values, recognition of markdowns and vendor allowances, and estimation of inventory shrinkage, and determination of cost of sales;



•

Recognition of income and expenses related to the Company's securitization program;



•

Determination of impairment of long-lived assets;



•

Recognition of advertising and catalogue costs;



•

Recognition of costs related to the Company's loyalty programs;



•

Recognition of income taxes; and



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Measurement of accruals for general liability, workers' compensation and health insurance as well as short-term disability, pension and postretirement health care benefits.

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        A description of the Company's critical accounting policies is included in the Company's Annual Report on Form 10-K for the fiscal year ended August 3, 2002.

2. Operating Segments

        The Company has identified two reportable segments: Specialty Retail Stores and Direct Marketing. The Specialty Retail Stores segment includes all Neiman Marcus and Bergdorf Goodman retail stores, including Neiman Marcus clearance stores. Direct Marketing includes the operations of Neiman Marcus Direct, which publishes NM by Mail, the Neiman Marcus Christmas catalogue, the Horchow catalogue and the Chef's Catalogue and the Company's online operations. Beginning in fiscal year 2001, all of the Company's online operations are included in Direct Marketing. Previously, certain online operations were included in Other. Therefore, the amounts below for the first quarter of fiscal year 2002 have been reclassified to conform to the current period presentation. Other includes the operations of Kate Spade LLC and Gurwitch Bristow Products, LLC (the Brand Development Companies) and corporate expenses.

        The following table sets forth the information for the Company's reportable segments:

3. Change in Accounting Principle—Writedown of Intangible Assets

        The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" as of the beginning of the first quarter of fiscal year 2003. SFAS No. 142 established a new fair value-based accounting model for the valuation of goodwill and indefinite-lived intangible assets recorded in connection with business combinations. Pursuant to the provisions of SFAS No. 142, goodwill and indefinite-lived intangible assets are measured for impairment by applying a fair value-based test at least annually and are not amortized.

5

        In connection with the adoption of the provisions of SFAS No. 142, the Company engaged third party appraisal experts to assist with the determination of the fair value of its goodwill and intangible assets. For each of the Company's operating segments, a summary of the intangible assets recorded by the Company as of the beginning of the first quarter of fiscal year 2003 in accordance with the cost-based accounting model established by previous accounting principles and the adjustment required to adopt the fair value model of SFAS No. 142 is as follows:

        The $24.1 million writedown in the carrying value of the indefinite-lived intangible assets of the Company's Direct Marketing segment is reflected as a change in accounting principle ($14.8 million, net of taxes) in the accompanying Condensed Consolidated Statements of Earnings for the first quarter of fiscal year 2003.

        The Company ceased amortization of its goodwill and indefinite-lived intangibles assets as of the beginning of fiscal year 2003. Amortization expense in the first quarter of fiscal year 2002 was approximately $1.5 million and reduced diluted earnings per share by $0.02 for the period.

4. Earnings per Share

        The weighted average shares used in computing basic and diluted earnings per share (EPS) are presented in the table below. No adjustments were made to net earnings for the computations of basic and diluted EPS during the periods presented.

6

        Options to purchase 1,957,300 shares of common stock for the thirteen weeks ended November 2, 2002 and 1,269,650 shares for the thirteen weeks ended October 27, 2001 were not included in the computation of diluted EPS because the exercise price of those options was greater than the average market price of the common shares.

5. Undivided Interests in NMG Credit Card Master Trust

        Pursuant to a revolving credit card securitization program, the Company transfers substantially all of its credit card receivables to a wholly-owned subsidiary, Neiman Marcus Funding Corporation, which in turn sells such receivables to the Neiman Marcus Credit Card Master Trust (the Trust). The Trust issued certificates representing undivided interests in the credit card receivables to both third-party investors (Sold Interests) and to the Company (Retained Interests). The Retained Interests are shown as "Undivided interests in NMG Credit Card Trust" on the Company's Condensed Consolidated Balance Sheets.

6. Derivative Financial Instruments

        As of November 2, 2002, the Company had foreign currency contracts in the form of forward exchange contracts in the amount of approximately $26.9 million. The contracts have varying maturity dates through August 2003. The settlement terms of the forward contracts, including amount, currency and maturity, correspond with the payment terms for purchases of merchandise inventories. These contracts have been designated and accounted for as cash flow hedges.

        At November 2, 2002, the fair value of the Company's outstanding foreign currency exchange contracts was an asset of approximately $0.5 million. This amount, net of taxes, is reflected in accumulated other comprehensive income.

7. Commitments and Contingencies

        The Company is involved in various suits and claims in the ordinary course of business. Management does not believe that the disposition of any such suits or claims will have a material adverse effect upon the consolidated results of operations, cash flows or the financial position of the Company.

8. Recent Accounting Pronouncements

        In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies the guidance previously provided in Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity is recognized at fair value when the liability is incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of SFAS No. 146 will be effective for disposal activities initiated after December 31, 2002. The Company does not expect that the implementation of SFAS No. 146 will have a material impact on the Company's consolidated financial position or results of operations.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FACTORS THAT MAY AFFECT FUTURE RESULTS

        Matters discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations include forward-looking statements, including statements regarding the Company's objectives and expectations concerning, among other things, its:

•

productivity and profitability;



•

merchandising and marketing strategies;



•

inventory performance;



•

store renovation and expansion plans;



•

capital expenditures;



•

liquidity; and



•

development of management information systems.

        These forward-looking statements are made based on management's expectations and beliefs concerning future events, as well as on assumptions made by and data currently available to management. Therefore, these forward-looking statements involve a number of risks and uncertainties and are not guarantees of future performance. A variety of factors could cause the Company's actual results to differ materially from the anticipated or expected results expressed in these forward-looking statements. Factors that could affect future performance include, but are not limited, to:

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current political and economic conditions;



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changes in political and economic conditions that may occur in the future;



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continued terrorist activities in the United States, as well as the potential escalation in the international war on terrorism;



•

changes in consumer confidence resulting in a reduction of discretionary spending on goods that are, or are perceived to be, "luxuries";



•

changes in demographic or retail environments;



•

changes in consumer preferences or fashion trends;



•

competitive responses to the Company's marketing, merchandising and promotional efforts and/or inventory liquidations by vendors or other retailers;



•

delays in the receipt of merchandise ordered by the Company due to work stoppages and/or other causes of delay in connection with either the manufacture or shipment of such merchandise;



•

seasonality of the retail business;



•

adverse weather conditions, particularly during peak selling seasons;

8

•

delays in anticipated store openings;



•

natural disasters;



•

significant increases in paper, printing and postage costs;



•

litigation that may have an adverse effect on the financial results or reputation of the Company;



•

changes in the Company's relationships with designers, vendors and other sources of merchandise;



•

the financial viability of the Company's designers, vendors and other sources of merchandise;



•

changes in foreign currency exchange rates;



•

changes in the Company's relationships with certain of its key sales associates;



•

changes in key management personnel;



•

changes in the Company's proprietary credit card arrangement that adversely impact its ability to provide consumer credit; or



•

changes in government or regulatory requirements increasing the Company's costs of operations.

        The Company undertakes no obligation to update or revise (publicly or otherwise) any forward-looking statements to reflect subsequent events, new information or future circumstances.

CRITICAL ACCOUNTING POLICIES

        The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events. Since future events and their effects cannot be determined with absolute certainty, actual results will differ from those estimates. The amounts currently estimated by the Company are subject to change if different assumptions as to the outcome of future events were made. The Company evaluates its estimates and judgments on an ongoing basis and predicates those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Management makes adjustments to its assumptions and judgments when facts and circumstances dictate. See Note 1 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 for a summary of the Company's critical accounting policies. A description of the Company's critical accounting policies is also included in the Company's Annual Report to Shareholders on Form 10-K for the fiscal year ended August 3, 2002.

OVERVIEW

        The Neiman Marcus Group, Inc., together with its operating divisions and subsidiaries, is a high-end specialty retailer. The Company's operations include the Specialty Retail Stores segment and the Direct Marketing segment. The Specialty Retail Stores segment consists primarily of Neiman Marcus and Bergdorf Goodman stores. The Direct Marketing segment conducts both print catalogue and online operations under the Neiman Marcus, Horchow and Chef's Catalogue brand names.

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        The following table sets forth certain items expressed as percentages of net sales for the periods indicated.

10

        Set forth in the following table is certain summary information with respect to the Company's operations for the periods indicated.

OPERATING RESULTS

(1)

Direct Marketing includes the operations of Neiman Marcus Direct and the Company's online operations.

(2)

Other includes the operations of the Brand Development Companies and corporate expenses.

(3)

Beginning in fiscal year 2001, all of the Company's online operations are included in Direct Marketing. Previously, certain online operations were included in Other. Therefore, the amounts above for the first quarter of fiscal year 2002 have been reclassified to conform to the current period presentation.

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THIRTEEN WEEKS ENDED NOVEMBER 2, 2002 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER 27, 2001

        Revenues.    Revenues for the first quarter of fiscal year 2003 of $734.1 million increased $52.9 million, or 7.8 percent, from $681.1 million in the prior year period. The increase in revenues was attributable to both an increase in comparable revenues and the revenues generated by new stores.

        Comparable revenues in the first quarter of fiscal year 2003 increased 5.8 percent compared to the first quarter of fiscal year 2002. Comparable revenues increased 4.8 percent for Specialty Retail Stores and 12.3 percent for Direct Marketing. The Company believes the increases in comparable revenues for both Specialty Retail Stores and Direct Marketing reflect a higher level of consumer spending in the first quarter of fiscal year 2003 compared to the prior year. Sales in September and October 2001 were significantly impacted by a decrease in consumer spending subsequent to the September 11, 2001 terrorist attacks in the United States. Comparable revenues in the first quarter of fiscal year 2002 declined by 10.9 percent.

        Comparable revenues for the Brand Development Companies declined in the first quarter of fiscal year 2003, with a decrease for Kate Spade LLC being offset, in part, by an increase for Gurwitch Bristow Products, LLC.

        The Company opened a new Neiman Marcus store in Coral Gables, Florida during September 2002 and a new Neiman Marcus store in Orlando, Florida during October 2002.

        Gross margin.    Gross margin was 38.2 percent of revenues for the first quarter of fiscal year 2003 compared to 36.0 percent for the first quarter of fiscal year 2002. The increase in gross margin was primarily due to decreases in both markdowns and buying and occupancy costs as percentages of revenues.

        Markdowns decreased as a percentage of revenues by approximately 3.9 percent for the first quarter of fiscal year 2003 compared to the prior year period. The Company incurred a higher level of markdowns in the first quarter of fiscal year 2002 in connection with additional and more aggressive promotional events necessary to clear inventories in response to declines in retail sales.

        A significant portion of the Company's buying and occupancy costs are fixed in nature. Buying and occupancy costs decreased as a percentage of revenues for the first quarter of fiscal year 2003 compared to the prior year period primarily due to an increase in revenues.

        Selling, general and administrative expenses.&