**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý****        QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

### **For the QuarterlyPeriod Ended January 29, 2005**

### ** **

**OR**

 

**o****        TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission file no. 1-9659**

 

**The Neiman Marcus Group, Inc.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **95-4119509**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
|                                                            |       |                                  |
| **One Marcus  Square  1618 Main Street  Dallas, Texas 75201**   |
| **(Address of principal executive  offices)**                   |
| ** **                                                      |
| **(214) 741-6911**                                              |
| (Registrant’s telephone number, including area code)       |

 

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).

 

YES ý                NO o

 

As of March 2, 2005,the number of outstanding shares of each of the issuer’s classes of commonstock was:

 
| **Class**                             | ** ** | **Outstanding Shares** |
|---------------------------------------|------------|------------------------|
| Class A Common  Stock, $.01 Par Value |       | 29,521,377             |
| Class B Common  Stock, $.01 Par Value |       | 19,422,379             |

 

 

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**THE NEIMAN MARCUS GROUP, INC.**

 

#### **INDEX**

 
| Part I.    | Financial  Information                                                                                                                            |   |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|       |                                                                                                                                              |   |
| Item 1.    | Condensed  Consolidated Balance Sheets as of January 29, 2005, July 31, 2004  and January 31, 2004                                 |   |
|       |                                                                                                                                              |   |
|       | Condensed  Consolidated Statements of Earnings for the Thirteen Weeks and Twenty-Six  Weeks Ended January 29, 2005 and January 31, 2004 |   |
|       |                                                                                                                                              |   |
|       | Condensed  Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended January 29,  2005 and January 31, 2004                  |   |
|       |                                                                                                                                              |   |
|       | Notes  to Condensed Consolidated Financial Statements                                                                                             |   |
|       |                                                                                                                                              |   |
| Item  2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                       |   |
|       |                                                                                                                                              |   |
| Item  3.   | Quantitative  and Qualitative Disclosures About Market Risk                                                                                       |   |
|       |                                                                                                                                              |   |
| Item 4.    | Controls and Procedures                                                                                                                           |   |
|       |                                                                                                                                              |   |
| Part II.   | Other Information                                                                                                                                 |   |
|       |                                                                                                                                              |   |
| Item 1.    | Legal  Proceedings                                                                                                                                |   |
|       |                                                                                                                                              |   |
| Item  2.   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                      |   |
|       |                                                                                                                                              |   |
| Item  4.   | Submission  of Matters to a Vote of Security Holders                                                                                              |   |
|       |                                                                                                                                              |   |
| Item 6.    | Exhibits                                                                                                                                          |   |
|       |                                                                                                                                              |   |
| Signatures |

 

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**THE NEIMAN MARCUS GROUP, INC.CONDENSED CONSOLIDATED BALANCESHEETS(UNAUDITED)**

 
| **(in thousands)**                                                           | ** ** | **January 29,  2005** | ** ** | **July 31,  2004** | ** ** | **January 31,  2004** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|
|                                                                         |       |                       |       |                    |       |                       |       |
| **ASSETS**                                                                   |       |                       |       |                    |       |                       |       |
| Current assets:                                                              |       |                       |       |                    |       |                       |       |
| Cash and cash equivalents                                                    |       | $                          | 377,857    |                    | $          | 368,367                    |       | $ | 251,658 |   |
| Undivided interests in NMG Credit Card Master Trust                          |       | —                     |       | —                  |       | 164,652                    |       |
| Accounts receivable, net of allowance of $11,259, $10,078  and $5,091        |       | 659,015                    |       | 551,687                 |       | 321,005                    |       |
| Merchandise inventories                                                      |       | 726,169                    |       | 720,277                 |       | 658,177                    |       |
| Other current assets                                                         |       | 79,679                     |       | 65,835                  |       | 75,985                     |       |
| Total current assets                                                         |       | 1,842,720                  |       | 1,706,166               |       | 1,471,477                  |       |
|                                                                         |       |                       |       |                    |       |                       |       |
| Property and equipment, net                                                  |       | 793,146                    |       | 763,931                 |       | 746,816                    |       |
| Other assets                                                                 |       | 119,327                    |       | 145,812                 |       | 112,380                    |       |
| Total assets                                                                 |       | $                          | 2,755,193  |                    | $          | 2,615,909                  |       | $ | 2,330,673 |   |
|                                                                         |       |                       |       |                    |       |                       |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                |       |                       |       |                    |       |                       |       |
| Current liabilities:                                                         |       |                       |       |                    |       |                       |       |
| Accounts payable                                                             |       | $                          | 241,946    |                    | $          | 289,282                    |       | $ | 227,121 |   |
| Accrued liabilities                                                          |       | 327,435                    |       | 286,833                 |       | 304,103                    |       |
| Notes payable and current maturities of long-term  liabilities               |       | 2,200                      |       | 1,563                   |       | 845                        |       |
| Current portion of borrowings under Credit Card  Facility                    |       | 225,000                    |       | 150,000                 |       | —                     |       |
| Total current liabilities                                                    |       | 796,581                    |       | 727,678                 |       | 532,069                    |       |
|                                                                         |       |                       |       |                    |       |                       |       |
| Long-term liabilities:                                                       |       |                       |       |                    |       |                       |       |
| Notes and debentures                                                         |       | 249,768                    |       | 249,757                 |       | 249,745                    |       |
| Borrowings under Credit Card Facility                                        |       | —                     |       | 75,000                  |       | 111,326                    |       |
| Deferred real estate credits                                                 |       | 68,707                     |       | 70,159                  |       | 72,677                     |       |
| Other long-term liabilities                                                  |       | 118,862                    |       | 112,455                 |       | 90,884                     |       |
| Total long-term liabilities                                                  |       | 437,337                    |       | 507,371                 |       | 524,632                    |       |
|                                                                         |       |                       |       |                    |       |                       |       |
| Minority interest                                                            |       | 11,664                     |       | 10,298                  |       | 10,729                     |       |
|                                                                         |       |                       |       |                    |       |                       |       |
| Common stocks                                                                |       | 497                        |       | 492                     |       | 492                        |       |
| Additional paid-in capital                                                   |       | 510,119                    |       | 491,849                 |       | 481,598                    |       |
| Accumulated other comprehensive loss                                         |       | (1,996                     | )          | (4,536                  | )          | (25,326                    | )          |
| Retained earnings                                                            |       | 1,026,652                  |       | 905,330                 |       | 828,525                    |       |
| Treasury stock,  at cost (768,731 shares, 710,227 shares and 699,777 shares) |       | (25,661                    | )          | (22,573                 | )          | (22,046                    | )          |
| Total shareholders’ equity                                              |       | 1,509,611                  |       | 1,370,562               |       | 1,263,243                  |       |
| Total liabilities and shareholders’ equity                              |       | $                          | 2,755,193  |                    | $          | 2,615,909                  |       | $ | 2,330,673 |   |

 

*See Notes to CondensedConsolidated Financial Statements.*

 

1

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**THE NEIMAN MARCUS GROUP, INC.CONDENSED CONSOLIDATED STATEMENTSOF EARNINGS(UNAUDITED)**

 
| **(in thousands, except per share data)**                                    | ** **                 | **Thirteen Weeks Ended** | ** **                 | **Twenty-Six Weeks Ended** | ** **                 |
|------------------------------------------------------------------------------|----------------------------|--------------------------|----------------------------|----------------------------|----------------------------|
| ** **                                                                   | **January 29,  2005** | ** **               | **January 31,  2004** | ** **                 | **January 29,  2005** | ** ** | **January 31,  2004** | ** ** |
|                                                                         |                       |                     |                       |                       |                       |   |   |   |   |
| Revenues                                                                     |                       | $                        | 1,129,225                  |                       | $                          | 1,048,367 |   | $ | 2,037,161 |   | $ | 1,867,136 |   |
| Cost of goods sold including buying and occupancy  costs                     |                       | 761,989                  |                       | 718,986                    |                       | 1,316,699 |   | 1,229,336 |   |
| Selling, general  and administrative expenses                                |                       | 247,576                  |                       | 239,380                    |                       | 475,539 |   | 450,511 |   |
| Loss on disposition of Chef’s Catalog                                   |                       | —                   |                       | —                     |                       | 15,348 |   | — |   |
|                                                                         |                       |                     |                       |                       |                       |   |   |   |   |
| Operating earnings                                                           |                       | 119,660                  |                       | 90,001                     |                       | 229,575 |   | 187,289 |   |
|                                                                         |                       |                     |                       |                       |                       |   |   |   |   |
| Interest expense, net                                                        |                       | 3,978                    |                       | 3,764                      |                       | 8,015 |   | 7,225 |   |
|                                                                         |                       |                     |                       |                       |                       |   |   |   |   |
| Earnings before income taxes and minority interest                           |                       | 115,682                  |                       | 86,237                     |                       | 221,560 |   | 180,064 |   |
|                                                                         |                       |                     |                       |                       |                       |   |   |   |   |
| Income taxes                                                                 |                       | 44,326                   |                       | 26,132                     |                       | 85,301 |   | 62,724 |   |
|                                                                         |                       |                     |                       |                       |                       |   |   |   |   |
| Earnings before minority interest                                            |                       | 71,356                   |                       | 60,105                     |                       | 136,259 |   | 117,340 |   |
|                                                                         |                       |                     |                       |                       |                       |   |   |   |   |
| Minority interest in net earnings of subsidiaries                            |                       | (769                     | )                          | (934                       | )                          | (1,556 | ) | (1,944 | ) |
|                                                                         |                       |                     |                       |                       |                       |   |   |   |   |
| Net earnings                                                                 |                       | $                        | 70,587                     |                       | $                          | 59,171 |   | $ | 134,703 |   | $ | 115,396 |   |
|                                                                         |                       |                     |                       |                       |                       |   |   |   |   |
| Weighted average number of common and common  equivalent shares outstanding: |                       |                     |                       |                       |                       |   |   |   |   |
| Basic                                                                        |                       | 48,309                   |                       | 47,954                     |                       | 48,268 |   | 47,789 |   |
| Diluted                                                                      |                       | 49,454                   |                       | 48,897                     |                       | 49,293 |   | 48,647 |   |
|                                                                         |                       |                     |                       |                       |                       |   |   |   |   |
| Earnings per share:                                                          |                       |                     |                       |                       |                       |   |   |   |   |
| Basic                                                                        |                       | $                        | 1.46                       |                       | $                          | 1.23 |   | $ | 2.79 |   | $ | 2.41 |   |
| Diluted                                                                      |                       | $                        | 1.43                       |                       | $                          | 1.21 |   | $ | 2.73 |   | $ | 2.37 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

2

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**THE NEIMAN MARCUS GROUP, INC.CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS(UNAUDITED)**

 
| **(in thousands)**                                                                                 | ** **                 | **Twenty-Six Weeks Ended** | ** **                 |
|----------------------------------------------------------------------------------------------------|----------------------------|----------------------------|----------------------------|
| ** **                                                                                         | **January 29,  2005** | ** **                 | **January 31,  2004** | ** ** |
|                                                                                               |                       |                       |                       |   |   |
| **CASH FLOWS - OPERATING ACTIVITIES**                                                              |                       |                       |                       |   |   |
| Net earnings                                                                                       |                       | $                          | 134,703                    |   | $ | 115,396 |   |
| Adjustments to reconcile net earnings to net cash  provided by (used for) operating activities:    |                       |                       |                       |   |   |
| Depreciation                                                                                       |                       | 51,196                     |                       | 48,284 |   |
| Loss on disposition of Chef’s Catalog                                                         |                       | 15,348                     |                       | — |   |
| Minority interest                                                                                  |                       | 1,556                      |                       | 1,944 |   |
| Other – primarily costs related to defined benefit  pension and other long-term benefit plans |                       | 16,090                     |                       | 24,829 |   |
|                                                                                               |                       | 218,893                    |                       | 190,453 |   |
| Changes in operating assets and liabilities:                                                       |                       |                       |                       |   |   |
| Increase in accounts receivable                                                                    |                       | (106,830                   | )                          | (298,410 | ) |
| (Increase)/decrease in merchandise inventories                                                     |                       | (16,209                    | )                          | 28,885 |   |
| Decrease in accounts payable and accrued liabilities                                               |                       | (1,970                     | )                          | (3,410 | ) |
| Contribution to defined benefit pension plan                                                       |                       | —                     |                       | (30,000 | ) |
| Other                                                                                              |                       | (17,797                    | )                          | 7,023 |   |
| **Net cash provided by (used for) operating  activities**                                          |                       | 76,087                     |                       | (105,459 | ) |
|                                                                                               |                       |                       |                       |   |   |
| **CASH FLOWS - INVESTING ACTIVITIES**                                                              |                       |                       |                       |   |   |
| Capital expenditures                                                                               |                       | (80,999                    | )                          | (52,942 | ) |
| Transactions related to undivided interests in NMG  Credit Card Master Trust:                      |                       |                       |                       |   |   |
| Purchases of held-to-maturity securities                                                           |                       | —                     |                       | (240,808 | ) |
| Maturities of held-to-maturity securities                                                          |                       | —                     |                       | 318,721 |   |
| Proceeds from sale of Chef’s Catalog                                                          |                       | 14,419                     |                       | — |   |
| **Net cash (used for) provided by investing  activities**                                          |                       | (66,580                    | )                          | 24,971 |   |
|                                                                                               |                       |                       |                       |   |   |
| **CASH FLOWS - FINANCING ACTIVITIES**                                                              |                       |                       |                       |   |   |
| Proceeds from borrowings                                                                           |                       | 637                        |                       | 1,000 |   |
| Repayment of debt                                                                                  |                       | —                     |                       | (1,000 | ) |
| Borrowings under Credit Card Facility                                                              |                       | —                     |                       | 111,326 |   |
| Acquisitions of treasury stock                                                                     |                       | (3,088                     | )                          | (7,026 | ) |
| Proceeds from stock-based compensation awards                                                      |                       | 16,273                     |                       | 21,560 |   |
| Cash dividends paid                                                                                |                       | (12,664                    | )                          | — |   |
| Distribution paid                                                                                  |                       | (1,175                     | )                          | (664 | ) |
| **Net cash (used for) provided by financing  activities**                                          |                       | (17                        | )                          | 125,196 |   |
|                                                                                               |                       |                       |                       |   |   |
| **CASH AND CASH EQUIVALENTS**                                                                      |                       |                       |                       |   |   |
| Increase during the period                                                                         |                       | 9,490                      |                       | 44,708 |   |
| Beginning balance                                                                                  |                       | 368,367                    |                       | 206,950 |   |
| Ending balance                                                                                     |                       | $                          | 377,857                    |   | $ | 251,658 |   |
|                                                                                               |                       |                       |                       |   |   |
| **SUPPLEMENTAL SCHEDULE OF CASH FLOW  INFORMATION**                                           |                       |                       |                       |   |   |
| Cash paid during the period for:                                                                   |                       |                       |                       |   |   |
| Interest                                                                                           |                       | $                          | 10,250                     |   | $ | 8,918 |   |
| Income taxes                                                                                       |                       | $                          | 72,151                     |   | $ | 51,935 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

 

3

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**THE NEIMAN MARCUS GROUP, INC.NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(UNAUDITED)**

 

1.               Basis ofPresentation

 

We have prepared theCondensed Consolidated Financial Statements of The Neiman Marcus Group, Inc.and its subsidiaries in accordance with generally accepted accountingprinciples for interim financial information and the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of theinformation and footnotes required by accounting principles generally acceptedfor complete financial statements. Therefore, these financial statements shouldbe read in conjunction with our Annual Report on Form 10-K for the fiscal yearended July 31, 2004.

 

Ourfiscal year ends on the Saturday closest to July 31.  All references to the second quarter of 2005relate to the thirteen weeks ended January 29, 2005 and all references tothe second quarter of 2004 relate to the thirteen weeks ended January 31,2004.  All references to 2005 relate tothe twenty-six weeks ended January 29, 2005 and all references to 2004related to the twenty-six weeks ended January 31, 2004.

 

In our opinion, theaccompanying unaudited Condensed Consolidated Financial Statements contain alladjustments, consisting of normal recurring adjustments, necessary to presentfairly our financial position, results of operations and cash flows for theapplicable interim periods.  The resultsof operations for these periods are not necessarily comparable to, orindicative of, results of any other interim period or for the fiscal year as awhole.

 

**We are required to make estimatesand assumptions about future events in preparing financial statements inconformity with generally accepted accounting principles.  These estimates and assumptions affect theamounts of assets, liabilities, revenues and expenses and the disclosure ofgain and loss contingencies at the date of the Condensed Consolidated FinancialStatements.  We evaluate our estimatesand judgments on an ongoing basis and predicate those estimates and judgmentson historical experience and on various other factors that we believe to bereasonable under the circumstances.  Wemake adjustments to our assumptions and judgments when facts and circumstancesdictate.  Since future events and theireffects cannot be determined with absolute certainty, actual results may differfrom the estimates used in preparing the accompanying Condensed ConsolidatedFinancial Statements.**

** **

**We believe the following criticalaccounting policies, among others, encompass the more significant judgments andestimates used in the preparation of our financial statements:**

** **

**•**                  Revenuerecognition;

 

**•**                  Valuation of merchandise inventories, includingdetermination of original retail values, recognition of markdowns and vendorallowances, estimation of inventory shrinkage, and determination of cost ofgoods sold;

 

**•**                  Determinationof impairment of long-lived assets;

 

**•**                  Recognitionof income and expenses related to our previous securitization program;

 

**•**                  Recognitionof advertising and catalog costs;

 

**•**                  Measurementof liabilities related to our loyalty programs;

 

**•**                  Recognition of income taxes; and

 

**•**                  Measurement of accruals for litigation,general liability, workers’ compensation and health insurance, short-termdisability, pension and postretirement health care benefits.

 

Adescription of our critical accounting policies is included in our AnnualReport on Form 10-K for the fiscal year ended July 31, 2004.

 

4

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***Stock-Based Compensation***.  We account for stock-based compensationawards to employees in accordance with Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations. Accordingly, we have recognized no compensation expense forstock options since all options granted had an exercise price equal to themarket value of our common stock on the grant date.

 

Thefollowing table illustrates the effect on net earnings and earnings per shareas if we had applied the fair value recognition provisions of SFAS No. 123to stock-based employee compensation using the Black-Scholes option-pricingmodel for 2005 and 2004:

 
| **(in thousands, except per share data)**                                                                       | ** **                 | **Thirteen Weeks Ended** | ** **                 | **Twenty-Six Weeks Ended** | ** **                 |
|-----------------------------------------------------------------------------------------------------------------|----------------------------|--------------------------|----------------------------|----------------------------|----------------------------|
| ** **                                                                                                      | **January 29,  2005** | ** **               | **January 31,  2004** | ** **                 | **January 29,  2005** | ** ** | **January 31,  2004** | ** ** |
|                                                                                                            |                       |                     |                       |                       |                       |   |   |   |   |
| Net earnings:                                                                                                   |                       |                     |                       |                       |                       |   |   |   |   |
| As reported                                                                                                     |                       | $                        | 70,587                     |                       | $                          | 59,171 |   | $ | 134,703 |   | $ | 115,396 |   |
| Less: stock-based employee compensation expense  determined under fair value based method, net of related taxes |                       | (2,147                   | )                          | (2,158                     | )                          | (4,110 | ) | (4,201 | ) |
| Pro forma                                                                                                       |                       | $                        | 68,440                     |                       | $                          | 57,013 |   | $ | 130,593 |   | $ | 111,195 |   |
|                                                                                                            |                       |                     |                       |                       |                       |   |   |   |   |
| Basic earnings per share:                                                                                       |                       |                     |                       |                       |                       |   |   |   |   |
| As reported                                                                                                     |                       | $                        | 1.46                       |                       | $                          | 1.23 |   | $ | 2.79 |   | $ | 2.41 |   |
| Pro forma                                                                                                       |                       | $                        | 1.42                       |                       | $                          | 1.19 |   | $ | 2.71 |   | $ | 2.33 |   |
|                                                                                                            |                       |                     |                       |                       |                       |   |   |   |   |
| Diluted earnings per share:                                                                                     |                       |                     |                       |                       |                       |   |   |   |   |
| As reported                                                                                                     |                       | $                        | 1.43                       |                       | $                          | 1.21 |   | $ | 2.73 |   | $ | 2.37 |   |
| Pro forma                                                                                                       |                       | $                        | 1.38                       |                       | $                          | 1.17 |   | $ | 2.65 |   | $ | 2.29 |   |

 

Theeffects on pro forma net earnings and earnings per share of expensing theestimated fair value of stock options are not necessarily representative of theeffects on reported net earnings for future periods due to such factors as thevesting periods of stock options and the potential issuance of additional stockoptions in future years.  In addition,the Black-Scholes option-pricing model has inherent limitations in calculatingthe fair value of stock options for which no active market exists since themodel does not consider the inability to sell or transfer options, vestingrequirements and a reduced exercise period upon termination of employment - allof which would reduce the fair value of the options.

 

5

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***Reclassification – Loyalty Programs*.**  A substantial portion of the points earned bycustomers in connection with our loyalty programs are redeemed for giftcards.  At the time the qualifying salesgiving rise to the loyalty program points are made, we defer the portion of therevenues on the qualifying sales transactions equal to our estimate of theretail value of the gift cards to be issued upon conversion of the points togift cards.   Beginning in the firstquarter of 2005, we began to record the deferral of revenues related to giftcard awards under our loyalty programs as a reduction of revenues. Previously,we charged  such amounts to selling,general and administrative expenses (SG&A). In addition, we now charge the cost of all other awards under ourloyalty programs to cost of goods sold (COGS) rather than SG&A.  These changes in classification do not impactthe previously reported operating earnings, net income or earnings per shareamounts.

 

Thefollowing table presents quarterly and annual information giving recognition tothe changes in classification related to our loyalty programs:

 
| **(in thousands)**    | ** ** | **Revenues** | ** ** | **COGS** | ** ** | **SG&A** | ** ** |
|-----------------------|------------|--------------|------------|----------|------------|--------------|------------|
|                  |       |         |       |     |       |         |       |
| **Fiscal Year 2004:** |       |         |       |     |       |         |       |
| First quarter         |       | $            | 818,769    |     | $          | 510,350      |       | $ | 211,130 |   |
| Second quarter        |       | 1,048,367    |       | 718,985  |       | 239,381      |       |
| Third quarter         |       | 873,167      |       | 544,663  |       | 208,909      |       |
| Fourth quarter        |       | 784,468      |       | 553,231  |       | 189,033      |       |
| Total                 |       | $            | 3,524,771  |     | $          | 2,327,229    |       | $ | 848,453 |   |
|                  |       |         |       |     |       |         |       |
| **Fiscal Year 2003:** |       |         |       |     |       |         |       |
| First quarter         |       | $            | 727,832    |     | $          | 455,307      |       | $ | 197,281 |   |
| Second quarter        |       | 934,844      |       | 655,459  |       | 220,981      |       |
| Third quarter         |       | 718,557      |       | 465,160  |       | 181,565      |       |
| Fourth quarter        |       | 699,120      |       | 502,510  |       | 179,981      |       |
| Total                 |       | $            | 3,080,353  |     | $          | 2,078,436    |       | $ | 779,808 |   |

 

***Reclassification – Construction Allowances. ***We periodically receiveallowances from developers related to the construction of our stores.  We have historically recorded theseallowances as a reduction of our capital expenditures and, as a result, thecarrying values of our property and equipment. Like other retailers, we have recently reviewed our accounting forleases and after consultation with Deloitte & Touche LLP, our independentregistered public accounting firm, we have changed the classification of thesedeveloper funds from a reduction of property and equipment to deferred realestate credits on our balance sheet. These deferred real estate credits are amortized over the lease termwhich is consistent with amortization period for the constructed assets.  As a result of the change in classification,property and equipment and long-term liabilities have been increased by $69million at January 29, 2005 and $73 million at January 31, 2004.

 

**2.**               Loss on Disposition of Chef’s Catalog

** **

In November 2004,we sold our Chef’s Catalog direct marketing business to a private equityfirm.  Chef’s Catalog is a multi-channelretailer of professional-quality kitchenware with revenues of approximately $73million in fiscal year 2004.  At October 30,2004, Chef’s Catalog had net tangible assets, primarily inventory, of $12.5million and net intangible assets of $17.2 million.  We received proceeds, net of selling costs,of $14.4 million from the sale.  As thecarrying value of the Chef’s Catalog assets exceeded the net proceeds from thesale, we incurred a pre-tax loss of $15.3 million in the first quarter of 2005related to the disposition of Chef’s Catalog.

 

3.               OperatingSegments

 

We have identified tworeportable segments: Specialty Retail Stores and Direct Marketing.  Our Specialty Retail Stores

 

6

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segment includes all ofour Neiman Marcus and Bergdorf Goodman retail stores, including Neiman Marcusclearance stores.  Our Direct Marketingsegment conducts both print catalog and online operations under the NeimanMarcus, Horchow and Bergdorf Goodman brand names and, until its disposition in November 2004,the Chef’s Catalog brand name.  Otherincludes the operations of Kate Spade LLC and Gurwitch Products, LLC (the BrandDevelopment Companies) and corporate expenses.

 

The following table sets forth the informationfor our reportable segments:

 
| **(in thousands)**                         | ** **                 | **Thirteen Weeks Ended** | ** **                 | **Twenty-Six Weeks Ended** | ** **                 |
|--------------------------------------------|----------------------------|--------------------------|----------------------------|----------------------------|----------------------------|
| ** **                                 | **January 29,  2005** | ** **               | **January 31,  2004** | ** **                 | **January 29,  2005** | ** ** | **January 31,  2004** | ** ** |
| REVENUES:                                  |                       |                     |                       |                       |                       |   |   |   |   |
| Specialty Retail Stores                    |                       | $                        | 911,982                    |                       | $                          | 831,775 |   | $ | 1,648,872 |   | $ | 1,496,249 |   |
| Direct Marketing                           |                       | 188,183                  |                       | 191,484                    |                       | 327,982 |   | 319,490 |   |
| Other                                      |                       | 29,060                   |                       | 25,108                     |                       | 60,307 |   | 51,397 |   |
| Total                                      |                       | $                        | 1,129,225                  |                       | $                          | 1,048,367 |   | $ | 2,037,161 |   | $ | 1,867,136 |   |
|                                       |                       |                     |                       |                       |                       |   |   |   |   |
| OPERATING EARNINGS:                        |                       |                     |                       |                       |                       |   |   |   |   |
| Specialty Retail Stores                    |                       | $                        | 98,688                     |                       | $                          | 72,799 |   | $ | 218,877 |   | $ | 163,909 |   |
| Direct Marketing                           |                       | 27,893                   |                       | 24,760                     |                       | 39,251 |   | 35,383 |   |
| Other                                      |                       | (6,921                   | )                          | (7,558                     | )                          | (13,205 | ) | (12,003 | ) |
| Loss on disposition of Chef’s Catalog |                       | —                   |                       | —                     |                       | (15,348 | ) | — |   |
| Total                                      |                       | $                        | 119,660                    |                       | $                          | 90,001 |   | $ | 229,575 |   | $ | 187,289 |   |

 

4.               StockRepurchase Program

 

Inprior years, our Board of Directors authorized various stock repurchaseprograms and increases in the number of shares subject to repurchase.  In the second quarter of 2005, we repurchased4,100 shares at an average price of $57.60. In the first quarter of 2005, we repurchased 54,404 shares at an averageprice of $52.40.  As of January 29,2005, approximately 1.2 million shares remain available for repurchase underour stock repurchase programs.

 

5.               Earningsper Share

 

Theweighted average shares used in computing basic and diluted earnings per share(EPS) are presented in the table below. We made no adjustments to net earnings for the computations of basic anddiluted EPS during the periods presented.

 
| **(in thousands of shares)**                           | ** **                 | **Thirteen Weeks Ended** | ** **                 | **Twenty-Six Weeks Ended** | ** **                 |
|--------------------------------------------------------|----------------------------|--------------------------|----------------------------|----------------------------|----------------------------|
| ** **                                             | **January 29,  2005** | ** **               | **January 31,  2004** | ** **                 | **January 29,  2005** | ** ** | **January 31,  2004** | ** ** |
|                                                   |                       |                     |                       |                       |                       |   |   |   |   |
| Weighted average shares outstanding                    |                       | 48,865                   |                       | 48,304                     |                       | 48,798 |   | 48,191 |   |
| Less: shares of non-vested restricted stock            |                       | (556                     | )                          | (350                       | )                          | (530 | ) | (402 | ) |
| Shares for computation of basic EPS                    |                       | 48,309                   |                       | 47,954                     |                       | 48,268 |   | 47,789 |   |
|                                                   |                       |                     |                       |                       |                       |   |   |   |   |
| Effect of dilutive stock options and restricted  stock |                       | 1,145                    |                       | 943                        |                       | 1,025 |   | 858 |   |
| Shares for computation of diluted EPS                  |                       | 49,454                   |                       | 48,897                     |                       | 49,293 |   | 48,647 |   |
|                                                   |                       |                     |                       |                       |                       |   |   |   |   |
| Shares represented by antidilutive stock options       |                       | —                   |                       | —                     |                       | 285 |   | 14 |   |

 

We donot include antidilutive stock options in the computation of diluted EPSbecause the exercise price of those options is greater than the average marketprice of the common shares.

 

7

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6.               UndividedInterests in NMG Credit Card Master Trust

 

Pursuantto a revolving credit card securitization program (the Credit Card Facility),we transfer substantially all of our credit card receivables to a wholly-ownedsubsidiary, Neiman Marcus Funding Corporation, which in turn sells suchreceivables to the Neiman Marcus Credit Card Master Trust (Trust).  At the inception of the Credit Card Facilityin September 2000, the Trust issued certificates representing undividedinterests in the credit card receivables to third-party investors in the faceamount of $225 million (Sold Interests). We hold certificates representing interests in the credit card portfolioequal to the excess of the balance of the credit card portfolio over $225million (Retained Interests).  In orderto maintain the committed level of securitized assets, the Trust uses cashcollections on the securitized receivables to purchase new credit card balancesfrom us in accordance with the terms of the Credit Card Facility.

 

Fromthe inception of the Credit Card Facility until December 2003, ourtransfers and sales of credit card receivables pursuant to the terms of theCredit Card Facility were accounted for as sales (Off-Balance SheetAccounting).  As a result, we removed$225 million of credit card receivables from our balance sheet at the inceptionof the Credit Card Facility and our $225 million repayment obligation to the holdersof the certificates representing the Sold Interests was not required to beshown as a liability on our consolidated balance sheet.  During the period the transfers and salesqualified for Off-Balance Sheet Accounting, our Retained Interests were shownas “Undivided interests in NMG Credit Card Master Trust” on our consolidatedbalance sheets.

 

Beginningin December 2003, our transfers to the Trust ceased to qualify forOff-Balance Sheet Accounting.  Rather,credit card receivables transferred to the Trust after November 2003remain on our balance sheet and our borrowings collateralized by those accountsreceivable are recorded as liabilities on our balance sheet  (Financing Accounting).  The transition period from Off-Balance SheetAccounting to Financing Accounting (Transition Period) lasted approximatelyfour months (December 2003 to March 2004).  During the Transition Period, we allocatedcash collections on our credit card receivables to the previous Sold Interestsand Retained Interests until such time as those balances were reduced to zeroand we recorded a liability for our repayment obligation to the holders of the$225 million of certificates representing the Sold Interests.

 

Areconciliation of the outstanding balance of our accounts receivable to thebalances recorded at January 29, 2005 and January 31, 2004 is asfollows:

 
| **(in millions)**                                                            | ** ** | **January 29,  2005** | ** ** | **January 31,  2004** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                                                         |       |                       |       |                       |       |
| Credit card receivables, net                                                 |       | $                          | 630.2      |                       | $          | 570.6 |   |
| Other receivables                                                            |       | 28.8                       |       | 28.8                       |       |
|                                                                         |       | 659.0                      |       | 599.4                      |       |
| Less: Sold Interests originally qualifying for  Off-Balance Sheet Accounting |       | —                     |       | (225.0                     | )          |
| Add: debt brought back onto the balance sheet                                |       | —                     |       | 111.3                      |       |
| Net balance                                                                  |       | $                          | 659.0      |                       | $          | 485.7 |   |
|                                                                         |       |                       |       |                       |       |
| Amounts reflected in the balance sheet:                                      |       |                       |       |                       |       |
| Undivided interests in NMG Credit Card Master Trust                          |       | $                          | —     |                       | $          | 164.7 |   |
| Accounts receivable, net                                                     |       | 659.0                      |       | 321.0                      |       |
|                                                                         |       | $                          | 659.0      |                       | $          | 485.7 |   |
|                                                                         |       |                       |       |                       |       |
| Current portion of borrowings under Credit Card  Facility                    |       | $                          | 225.0      |                       | $          | — |   |
| Borrowings under Credit Card Facility                                        |       | $                          | —     |                       | $          | 111.3 |   |

 

Afterthe Transition Period, our entire credit card portfolio is included in accountsreceivable in our consolidated balance sheet and the $225 million repaymentobligation is shown as a liability.

 

8

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7.               EmployeeBenefit Plans

 

***Description of Benefit Plans.***  We sponsor a defined benefit pension plan(Pension Plan) covering substantially all full-time employees.  We also sponsor an unfunded supplementalexecutive retirement plan (SERP Plan) that provides additional pension benefitsto certain employees.  Benefits underboth plans are based on the employees’ years of service and compensation overdefined periods of employment.  PensionPlan assets consist primarily of equity and fixed income securities.

 

Retirees and active employees hired prior to March 1,1989 are eligible to participate in a plan providing certain limitedpostretirement health care benefits (Postretirement Plan) if they have metcertain service and minimum age requirements.

 

***Costs of Benefits. ***Thecomponents of the expenses incurred under our Pension Plan, SERP Plan andPostretirement Plan are as follows:                        

 
| **(in thousands)**                                 | ** **                 | **Thirteen Weeks Ended** | ** **                 | **Twenty-Six Weeks Ended** | ** **                 |
|----------------------------------------------------|----------------------------|--------------------------|----------------------------|----------------------------|----------------------------|
| ** **                                         | **January 29,  2005** | ** **               | **January 31,  2004** | ** **                 | **January 29,  2005** | ** ** | **January 31,  2004** | ** ** |
|                                               |                       |                     |                       |                       |                       |   |   |   |   |
| Pension Plan:                                      |                       |                     |                       |                       |                       |   |   |   |   |
| Service cost                                       |                       | $                        | 3,196                      |                       | $                          | 2,935 |   | $ | 6,392 |   | $ | 6,103 |   |
| Interest cost                                      |                       | 4,636                    |                       | 4,469                      |                       | 9,271 |   | 9,292 |   |
| Expected return on plan assets                     |                       | (4,712                   | )                          | (4,481                     | )                          | (9,425 | ) | (9,316 | ) |
| Net amortization of losses and prior service costs |                       | 1,208                    |                       | 866                        |                       | 2,418 |   | 1,799 |   |
| Pension Plan expense                               |                       | $                        | 4,328                      |                       | $                          | 3,789 |   | $ | 8,656 |   | $ | 7,878 |   |
|                                               |                       |                     |                       |                       |                       |   |   |   |   |
| SERP Plan:                                         |                       |                     |                       |                       |                       |   |   |   |   |
| Service cost                                       |                       | $                        | 361                        |                       | $                          | 342 |   | $ | 722 |   | $ | 682 |   |
| Interest cost                                      |                       | 1,014                    |                       | 979                        |                       | 2,028 |   | 1,953 |   |
| Net amortization of losses and prior service costs |                       | 384                      |                       | 367                        |                       | 768 |   | 733 |   |
| SERP Plan expense                                  |                       | $                        | 1,759                      |                       | $                          | 1,688 |   | $ | 3,518 |   | $ | 3,368 |   |
|                                               |                       |                     |                       |                       |                       |   |   |   |   |
| Postretirement Plan:                               |                       |                     |                       |                       |                       |   |   |   |   |
| Service cost                                       |                       | $                        | 15                         |                       | $                          | 20 |   | $ | 29 |   | $ | 40 |   |
| Interest cost                                      |                       | 318                      |                       | 386                        |                       | 636 |   | 770 |   |
| Net amortization of losses                         |                       | 26                       |                       | 111                        |                       | 53 |   | 220 |   |
| Postretirement Plan expense                        |                       | $                        | 359                        |                       | $                          | 517 |   | $ | 718 |   | $ | 1,030 |   |

 

***Funding Policy and Plan Assets.***  Our policy is to fund the Pension Plan at orabove the minimum required by law.  In2004, we made voluntary contributions of $30.0 million in the second quarterand $15.0 million in the fourth quarter for the plan year ended July 31,2003.  Based upon currently availableinformation, we will not be required to make contributions to the Pension Planfor either the 2004 or 2005 plan years.

 

**8.**               Commitments and Contingencies

** **

**We are involved in various suitsand claims in the ordinary course of business. We do not believe that the disposition of any such suits or claims willhave a material adverse effect upon our consolidated results of operations,cash flows or financial position.**

** **

**9**

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** **

**ITEM 2.**      MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

** **

**EXECUTIVE OVERVIEW**

 

**Company Profile**

** **

The Neiman Marcus Group,Inc., together with its operating divisions and subsidiaries, is a high-endspecialty retailer.  Our operationsinclude the Specialty Retail Stores segment and the Direct Marketing segment.  Our Specialty Retail Stores segment consistsprimarily of Neiman Marcus and Bergdorf Goodman stores.  Our Direct Marketing segment conducts bothprint catalog and online operations under the brand names of Neiman Marcus,Horchow and Bergdorf Goodman and until its disposition in November 2004,the Chef’s Catalog brand name.  In November 2004,we sold our Chef’s Catalog operations, as more fully described in Note 2 to theCondensed Consolidated Financial Statements.

 

We own a 51 percentinterest in Gurwitch Products, LLC, which distributes and markets the LauraMercier cosmetic line, and a 56 percent interest in Kate Spade LLC, amanufacturer and retailer of high-end designer handbags and accessories.  Gurwitch Products, LLC and Kate Spade LLC arehereafter referred to collectively as the “Brand Development Companies.”

 

Our fiscal year ends onthe Saturday closest to July 31. All references to the second quarter of 2005 relate to the thirteenweeks ended January 29, 2005 and all references to the second quarter of2004 relate to the thirteen weeks ended January 31, 2004.  All references to 2005 relate to thetwenty-six weeks ended January 29, 2005 and all references to 2004 relateto the twenty-six weeks ended January 31, 2004.

 

The informationcontained in this “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” (MD&A) should be read in conjunction with ourAnnual Report on Form 10-K for the fiscal year ended July 31, 2004.  Unless otherwise specified, the meanings ofall defined terms in MD&A are consistent with the meanings of such terms asdefined in the Notes to the Condensed Consolidated Financial Statements.

 

**Overviewof the Business**

 

We believe that ourunique product assortment of luxury, designer and fashion merchandise, coupledwith our sales promotion activities and our commitment to superior customerservice, have been critical to our success in the past.  In addition, we believe these factors arecritical to our future growth and success.

 

We conduct our sellingactivities in two primary selling seasons, Fall and Spring.  Sales and margins fluctuate during eachselling season due to the results of in-store marketing and full-price sellingtowards the beginning of each season and sales on a marked down basis towards the end of each season.  As a result of the seasonality of our sellingactivities, inventory management is critical to our success.

 

Inherent in thesuccessful execution of our business plans, particularly our inventorymanagement strategy, is our ability both to predict the fashion trends thatwill be of interest to our customers and to anticipate the future spendingpatterns of our customer base. Accordingly, we monitor the sales performance of our inventoriesthroughout each season.  We seek to orderadditional goods to supplement our original purchasing decisions when the levelof customer demand is higher than originally anticipated.  However, in certain merchandise categories,particularly fashion apparel, our ability to purchase additional goods can belimited.  This can result in lost salesin the event of higher than anticipated demand for the fashion goods offered ora higher than anticipated level of consumer spending.  Conversely, in the event we buy fashion goodsthat are not accepted by our customer or the level of consumer spending is lessthan we anticipated, we typically incur a higher than anticipated level ofmarkdowns, net of vendor allowances, to sell the goods that remain at the endof the season, resulting in lower operating profits.  We believe that the experience of ourmerchandising and selling organizations helps to minimize the inherent risk inpredicting fashion trends and related demand.

 

10

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**SecondQuarter Fiscal Year 2005 Highlights**

 

Diluted earnings pershare for the second quarter of 2005 increased 18.2 percent to $1.43 from $1.21in the prior year period. Other significant highlights for the second quarterof 2005 include:

 

**•**                  **Revenues** – Ourrevenues for the second quarter of 2005 were $1,129.2 million compared to$1,048.4 million in the prior year period. Revenues increased 7.7 percent in the second quarter of 2005 whilecomparable revenues increased 10.4 percent. Year to date, revenues have increased 9.1 percent while comparablerevenues have increased 10.8 percent.  Wehave experienced double digit percentage increases in comparable store sales ineach of our last six consecutive quarters. For Specialty Retail Stores, our sales per square foot for the lasttwelve trailing months increased to $555 as of January 2005 compared to$494 as of January 2004.

 

**•**                  **Margins** –Margins increased to 32.5 percent of revenues in the second quarter of 2005from 31.4 percent in the second quarter of 2004.  Year to date, margins have increased to 35.4percent of revenues from 34.2 percent in the prior year period.  These increases are reflective of the highlevel of acceptance and demand for the fashion goods we offer as well as ourefforts to more closely align purchases and customer demand.

 

**•**                  **Selling, general andadministrative expenses** – Selling, general and administrative(SG&A) expenses decreased to 21.9 percent of revenues in the second quarterof 2005 from 22.8 percent in the second quarter 2004 and to 23.3 percent ofrevenues year-to-date from 24.1 percent in the prior year period.

 

**•**                  **Operating earnings**–Operating earnings increased 33.0 percent in the second quarter of 2005,representing 10.6 percent of our revenues compared to 8.6 percent in the secondquarter of 2004.  Year to date, operatingearnings increased 22.6 percent, representing 11.3 percent of our revenues for2005 compared to 10.0 percent in 2004. Operating earnings were 10.8 percent of revenues in the second quarterand 13.3 percent year to date for our Specialty Retail Stores and 14.8 percentof revenues in the second quarter and 12.0 percent year to date for DirectMarketing.

 

**OPERATING RESULTS**

 

**Performance Summary**

 

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

 
| ** **                                               | ** ** | **Thirteen Weeks Ended**   | ** ** | **Twenty-Six Weeks Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                               | ** ** | **January 29,  2005** | ** ** | **January 31,  2004** | ** ** | **January 29,  2005** | ** ** | **January 31,  2004** | ** ** |
| ** **                                               | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| ** **                                               | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                 |       | 100.0                      | %          | 100.0                      | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold including buying and occupancy  costs |       | 67.5                       |       | 68.6                       |       | 64.6 |   | 65.8 |   |
| Selling, general and administrative expenses             |       | 21.9                       |       | 22.8                       |       | 23.3 |   | 24.1 |   |
| Loss on disposition of Chef’s Catalog               |       | —                     |       | —                     |       | 0.8 |   | — |   |
| Operating earnings                                       |       | 10.6                       |       | 8.6                        |       | 11.3 |   | 10.0 |   |
| Interest expense, net                                    |       | 0.4                        |       | 0.4                        |       | 0.4 |   | 0.4 |   |
| Earnings before income taxes and minority interest       |       | 10.2                       |       | 8.2                        |       | 10.9 |   | 9.6 |   |
| Income taxes                                             |       | 3.9                        |       | 2.5                        |       | 4.2 |   | 3.3 |   |
| Earnings before minority interest                        |       | 6.3                        |       | 5.7                        |       | 6.7 |   | 6.3 |   |
| Minority interest in net earnings of subsidiaries        |       | (0.1                       | )          | (0.1                       | )          | (0.1 | ) | (0.1 | ) |
| Net earnings                                             |       | 6.3                        | %          | 5.6                        | %          | 6.6 | % | 6.2 | % |

 

11

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Set forth in thefollowing table is certain summary information with respect to our operationsfor the periods indicated.

 
| **(dollars in millions)**                  | ** **                 | **Thirteen Weeks Ended** | ** **                 | **Twenty-Six Weeks Ended** | ** **                 |
|--------------------------------------------|----------------------------|--------------------------|----------------------------|----------------------------|----------------------------|
| ** **                                 | **January 29,  2005** | ** **               | **January 31,  2004** | ** **                 | **January 29,  2005** | ** ** | **January 31,  2004** | ** ** |
|                                       |                       |                     |                       |                       |                       |   |   |   |   |
| REVENUES                                   |                       |                     |                       |                       |                       |   |   |   |   |
| Specialty Retail Stores                    |                       | $                        | 912.0                      |                       | $                          | 831.8 |   | $ | 1,648.9 |   | $ | 1,496.2 |   |
| Direct Marketing                           |                       | 188.2                    |                       | 191.5                      |                       | 328.0 |   | 319.5 |   |
| Other (1)                                  |                       | 29.0                     |                       | 25.1                       |                       | 60.3 |   | 51.4 |   |
| Total                                      |                       | $                        | 1,129.2                    |                       | $                          | 1,048.4 |   | $ | 2,037.2 |   | $ | 1,867.1 |   |
|                                       |                       |                     |                       |                       |                       |   |   |   |   |
| OPERATING EARNINGS                         |                       |                     |                       |                       |                       |   |   |   |   |
| Specialty Retail Stores                    |                       | $                        | 98.7                       |                       | $                          | 72.8 |   | $ | 218.9 |   | $ | 163.9 |   |
| Direct Marketing                           |                       | 27.9                     |                       | 24.8                       |                       | 39.3 |   | 35.4 |   |
| Other (1)                                  |                       | (6.9                     | )                          | (7.6                       | )                          | (13.3 | ) | (12.0 | ) |
| Loss on disposition of Chef’s Catalog |                       | —                   |                       | —                     |                       | (15.3 | ) | — |   |
| Total                                      |                       | $                        | 119.7                      |                       | $                          | 90.0 |   | $ | 229.6 |   | $ | 187.3 |   |
|                                       |                       |                     |                       |                       |                       |   |   |   |   |
| OPERATING PROFIT MARGIN                    |                       |                     |                       |                       |                       |   |   |   |   |
| Specialty Retail Stores                    |                       | 10.8                     | %                          | 8.8                        | %                          | 13.3 | % | 11.0 | % |
| Direct Marketing                           |                       | 14.8                     | %                          | 12.9                       | %                          | 12.0 | % | 11.1 | % |
| Total                                      |                       | 10.6                     | %                          | 8.6                        | %                          | 11.3 | % | 10.0 | % |
|                                       |                       |                     |                       |                       |                       |   |   |   |   |
| COMPARABLE REVENUES (2)                    |                       |                     |                       |                       |                       |   |   |   |   |
| Specialty Retail Stores (3)                |                       | 9.6                      | %                          | 10.2                       | %                          | 10.3 | % | 10.0 | % |
| Direct Marketing (4)                       |                       | 15.8                     | %                          | 25.7                       | %                          | 14.7 | % | 20.3 | % |
| Total (3), (4)                             |                       | 10.4                     | %                          | 12.7                       | %                          | 10.8 | % | 11.9 | % |
|                                       |                       |                     |                       |                       |                       |   |   |   |   |
| SALES PER SQUARE FOOT                      |                       |                     |                       |                       |                       |   |   |   |   |
| Specialty Retail Stores                    |                       | $                        | 168                        |                       | $                          | 154 |   | $ | 305 |   | $ | 278 |   |
|                                       |                       |                     |                       |                       |                       |   |   |   |   |
| STORE COUNT                                |                       |                     |                       |                       |                       |   |   |   |   |
| Neiman Marcus and Bergdorf Goodman stores: |                       |                     |                       |                       |                       |   |   |   |   |
| Open at beginning of period                |                       | 37                       |                       | 37                         |                       | 37 |   | 37 |   |
| Opened during the period                   |                       | —                   |                       | —                     |                       | — |   | — |   |
| Open at end of period                      |                       | 37                       |                       | 37                         |                       | 37 |   | 37 |   |
| Clearance centers:                         |                       |                     |                       |                       |                       |   |   |   |   |
| Open at beginning of period                |                       | 14                       |                       | 14                         |                       | 14 |   | 14 |   |
| Opened during the period                   |                       | 1                        |                       | —                     |                       | 1 |   | — |   |
| Open at end of period                      |                       | 15                       |                       | 14                         |                       | 15 |   | 14 |   |

 

----

(1)   Other includes the operations of theBrand Development Companies and corporate expenses.

 

(2)   Comparable revenues include 1) revenuesderived from our retail stores open for more than 52 weeks, including storesthat have been relocated or expanded, 2) revenues from our Direct Marketingoperations and 3) wholesale revenues from our Brand Development Companies.

 

**(3)**   The calculation of the changes in comparablerevenues has been adjusted to give recognition to the change in classificationof revenues deferred in connection with our loyalty programs, as more fullydescribed in Note 1 to the Condensed Consolidated Financial Statements.

** **

**(4)**   The calculation of the changes in comparablerevenues has been adjusted to exclude the revenues of Chef’s Catalog for allperiods prior to our sale of these operations in November 2004, as morefully described in Note 2 to the Condensed Consolidated Financial Statements.

** **

**12**

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** **

**Thirteen Weeks Ended January 29,2005 Compared to Thirteen Weeks Ended January 31, 2004**

** **

***Revenues.**** *Our revenues for thesecond quarter of 2005 of $1,129.2 million increased $80.8 million, or 7.7percent, from $1,048.4 million in the second quarter of 2004.

 

Comparable revenues inthe second quarter of 2005 increased 10.4 percent compared to the prior yearperiod.  Comparable revenues increased9.6 percent for Specialty Retail Stores and 15.8 percent for DirectMarketing.  Comparable revenues in thesecond quarter of 2004 increased by 12.7 percent.

 

Revenues increased in thesecond quarter of 2005 compared to the prior year at all our operatingcompanies, consistent with a higher level of consumer spending, in general,with a higher increase coming from the affluent luxury customer served by the Company.  In addition, we believe the increases incomparable revenues were driven by sales events conducted by our SpecialtyRetail Stores and by the growth of internet sales for Direct Marketing.  In the second quarter of 2005, internet salesby Direct Marketing, excluding Chef’s Catalog, were $98.5 million, an increaseof 49.0 percent from the second quarter of 2004.

 

***Grossmargin.***  Due topromotional events and the markdowns incurred in the second quarter related tothe clearance of Fall Season merchandise, we generate a lower gross margin inthe second quarter compared to the first quarter of each year.  Our gross margin was 32.5 percent of revenuesfor the second quarter of 2005 compared to 31.4 percent in the prior yearperiod.  The increase in gross marginfrom the prior year period was due primarily to:

 

•                  higher productmargins;

 

•                  a decrease inbuying and occupancy costs as a percentage of revenues.

 

We generated higherproduct margins at our Specialty Retail Stores during the second quarter of2005.  We believe this increase inproduct margins was due to the higher level of full-price sales generatedduring the quarter and our continued emphasis on inventory management.  We incurred a higher level of net markdownsin our Direct Marketing operations due to lower than anticipated sales in ourcatalog operations during the December holiday season.

 

Consistent with industrybusiness practice, we receive allowances from certain of our vendors in supportof the merchandise we purchase for resale. We receive certain allowances to reimburse us for markdowns taken and/orto support the gross margins earned in connection with the sales of the vendor’smerchandise.  We recognize theseallowances as an increase to gross margin when the allowances are earned andapproved by the vendor.  Other allowanceswe receive represent reductions to the amounts paid to acquire themerchandise.  We recognize theseallowances as a reduction in the cost of the acquired merchandise resulting inan increase to gross margin at the time the goods are sold.  While the dollar value of the vendorreimbursements we received decreased slightly as a percentage of revenues inthe second quarter of 2005 compared to the prior year period, primarily due toa higher level of full-price selling, this decrease did not have a significantimpact on the year-over-year change in the gross margin we realized in thesecond quarter of 2005.

 

A significant portion ofour buying and occupancy costs are fixed in nature.  Buying and occupancy costs decreased as apercentage of revenues during the second quarter of 2005 compared to the prioryear period primarily due to the leveraging of fixed expenses, includingpayroll expenses and depreciation, over the higher level of revenues wegenerated during the second quarter of 2005.

 

***Selling,general and administrative expenses*.**  SG&A expenses were 21.9 percent ofrevenues in the second quarter of 2005 compared to 22.8 percent of revenues inthe prior year period.

 

The net decrease inSG&A expenses as a percentage of revenues in the second quarter of 2005 wasprimarily due to:

 

•                  lower marketing and advertising costsfor Direct Marketing consistent with a planned shift in spending to the firstquarter of 2005;

 

•                  lower costs for incentivecompensation;

 

•                  lower professional fees;

 

•                  productivity improvements for ourSpecialty Retail Stores in various expense categories, including payroll andadvertising, as a result of the higher level of revenues in the second quarterof 2005.

 

13

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In addition, SG&Aexpense in the second quarter of 2004 included a $5.3 million reduction in theincome generated by the Company’s credit card portfolio due to the requiredamortization during the Transition Period of the premium associated with thecarrying value of the Retained Interests, as more fully described in Note 6 ofthe Notes to Condensed Consolidated Financial Statements.

 

These decreases inSG&A expenses as a percentage of revenues were partially offset by:

 

•                  the increase in preopening costsincurred in the second quarter of 2005 in connection with the remodel of ourstores in San Francisco, Newport Beach, Los Angeles and Houston;

 

•                  increases in payroll for our DirectMarketing and the Brand Development Companies in support of new businessinitiatives and the expansion of Kate Spade operations.

 

In addition, SG&Aexpenses were reduced in the second quarter of 2004 by the favorable impact ofconclusions of certain sales tax and unclaimed property examinations for whichthe agreed-on settlements were less than the amounts previously estimated bythe Company.

 

***Segmentoperating earnings.*** Operating earnings for our Specialty Retail Stores segment were $98.7million for the second quarter of 2005 compared to $72.8 million for the prioryear period.  This 35.6 percent increasewas primarily the result of increased sales and gross margin and net decreasesin both buying and occupancy expenses and SG&A expenses as a percentage ofrevenues.

 

Operating earnings forDirect Marketing increased to $27.9 million in the second quarter of 2005 from$24.8 million for the prior year period, primarily as a result of increasedrevenues and net decreases in both buying and occupancy costs and SG&Aexpenses as a percentage of revenues.

 

***Interestexpense, net*.**  Netinterest expense was $4.0 million in the second quarter of 2005 and $3.8million for the prior year period.

 

***Incometaxes.***  Oureffective income tax rate was 38.3 percent for the second quarter of 2005 and30.3 percent for the prior year period. In the second quarter of 2004, the Company recognized a net income taxbenefit of $7.5 million related to favorable settlements associated withprevious state tax filings.  Excludingthis benefit, the effective tax rate was 39.0 percent for the second quarter of2004.

 

**Twenty-Six Weeks Ended January 29,2005 Compared to Twenty-Six Weeks Ended January 31, 2004**

** **

***Revenues.**** *Our revenues for2005 of $2,037.2 million increased $170.1 million, or 9.1 percent, from$1,867.1 million in 2004.

 

Comparable revenues in2005 increased 10.8 percent compared to the prior year period.  Comparable revenues increased 10.3 percentfor Specialty Retail Stores and 14.7 percent for Direct Marketing.  Comparable revenues in 2004 increased by 11.9percent.

 

Excluding the revenuesfrom our Chef’s Catalog operations in 2004, revenues increased in 2005 comparedto the prior year at all our operating companies, consistent with a higherlevel of consumer spending, in general, with a higher increase coming from theaffluent luxury customer served by the company. In addition, we believe the increases in comparable revenues were drivenby sales events conducted by our Specialty Retail Stores and by the growth ofinternet sales for Direct Marketing.  In2005, internet sales by Direct Marketing, excluding Chef’s Catalog, were $159.2million, an increase of 46.5 percent from 2004.

 

14

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***Grossmargin.***  Grossmargin was 35.4 percent of revenues for 2005 compared to 34.2 percent in theprior year period.  The increase in grossmargin was due primarily to:

 

•                  higher productmargins;

 

•                  a decrease inbuying and occupancy costs as a percentage of revenues.

 

We generated higherproduct margins at our Specialty Retail Stores during 2005.  We believe this increase in product marginswas due to the higher level of full-price sales generated for the period andour continued emphasis on inventory management. We incurred a higher level of net markdowns in 2005 for Direct Marketingdue to lower than anticipated sales in our catalog operations during the December holidayseason.

 

Consistent with industrybusiness practice, we receive allowances from certain of our vendors in supportof the merchandise we purchase for resale. We receive certain allowances to reimburse us for markdowns taken and/orto support the gross margins earned in connection with the sales of the vendor’smerchandise.  We recognize theseallowances as an increase to gross margin when the allowances are earned andapproved by the vendor.  Other allowanceswe receive represent reductions to the amounts paid to acquire themerchandise.  We recognize theseallowances as a reduction in the cost of the acquired merchandise resulting inan increase to gross margin at the time the goods are sold.  While the dollar value of the vendorreimbursements we received decreased slightly as a percentage of revenues in2005 compared to the prior year period, primarily due to a higher level offull-price selling, this decrease did not have a significant impact on theyear-over-year change in the gross margin we realized in 2005.

 

A significant portion ofour buying and occupancy costs are fixed in nature.  Buying and occupancy costs decreased as apercentage of revenues during 2005 compared to the prior year period primarilydue to the leveraging of fixed expenses, including payroll expenses anddepreciation, over these higher level of revenues we generated during 2005.

 

***Selling,general and administrative expenses*.**  SG&A expenses were 23.3 percent ofrevenues in 2005 compared to 24.1 percent of revenues in the prior year period.

 

The net decrease inSG&A expenses as a percentage of revenues in 2005 was primarily due to:

 

•                  lower costs for incentivecompensation;

 

•                  productivity improvements for ourSpecialty Retail Stores in various expense categories, including payroll andadvertising, and for Direct Marketing, primarily advertising, as a result ofthe higher level of revenues in 2005.

 

In addition, SG&Aexpense in  2004 included a $5.3 millionreduction in the income generated by the Company’s credit card portfolio due tothe required amortization during the Transition Period of the premiumassociated with the carrying value of the Retained Interests, as more fullydescribed in Note 6 of the Notes to Condensed Consolidated Financial Statements.

 

These decreases inSG&A expenses as a percentage of revenues were partially offset byincreases in payroll for our Direct Marketing and Brand Development Companiesin support of new business initiatives and the expansion of Kate Spadeoperations.  In addition, SG&Aexpenses were reduced in the second quarter of 2004 for the favorable impact ofconclusions of certain sales tax and unclaimed property examinations for whichthe agreed-on settlements were less than the amounts previously estimated bythe Company.

 

***Losson disposition of Chef’s Catalog*.**   In November 2004, we sold our Chef’sCatalog direct marketing business to a private equity firm.  Chef’s Catalog is a multi-channel retailer ofprofessional-quality kitchenware with revenues of approximately $73 million infiscal year 2004.  At October 30,2004, Chef’s Catalog had net tangible assets, primarily inventory, of $12.5million and net intangible assets of $17.2 million.  We received proceeds, net of selling costs,of $14.4 million from the sale. As the carrying value of the Chef’s Catalogassets exceeded the net proceeds from the sale, we incurred a pre-tax loss of$15.3 million in the first quarter of 2005 related to the disposition of Chef’sCatalog.

 

***Segmentoperating earnings.*** Operating earnings for our Specialty Retail Stores segment were $218.9million for 2005 compared to $163.9 million for the prior year period.  This 33.6 percent increase was primarily theresult of increased sales and margins and net decreases in both buying and occupancyexpenses and SG&A expenses as a percentage of revenues.

 

Operating earnings forDirect Marketing increased to $39.3 million in 2005 from $35.4 million for theprior year period, primarily as a result of increased revenues and netdecreases in both buying and occupancy costs and SG&A expenses as apercentage of revenues.

 

***Interestexpense, net*.**  Netinterest expense was $8.0 million in 2005 and $7.2 million for the prior yearperiod.

 

15

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***Incometaxes.***  Oureffective income tax rate was 38.5 percent for 2005 and 34.8 percent for theprior year period.  In the second quarterof 2004, the Company recognized a net income tax benefit of $7.5 millionrelated to favorable settlements associated with previous state taxfilings.  Excluding this benefit, theeffective tax rate was 39.0 percent for 2004.

 

**Outlook**

 

Based on currentestimates, we anticipate increases in comparable store revenues of 3 to 5percent for our third quarter ending April 30, 2005.  Comparable revenues increased by 22.0 percentin our quarter ended May 1, 2004.  Theaccuracy of our assumptions and forecasts is subject to uncertainties andcircumstances beyond our control. Consequently, actual results could differ materially from the forecastedresults.  See “Factors That May AffectFuture Results” for a discussion of items and events that could cause ouractual results to vary from our expectations.

 

**Inflation andDeflation**

** **

We believe changes inrevenues and net earnings that have resulted from inflation or deflation havenot been material during the periods presented. In recent years, we have experienced certain inflationary conditionsrelated to 1) increases in product costs due primarily to changes in foreigncurrency exchange rates that have reduced the purchasing power of the U.S.dollar and 2) increases in SG&A.  Weattempt to offset the effects of inflation through control of expenses andprice increases, although our ability to increase prices may be limited bycompetitive factors.  We attempt tooffset the effects of merchandise deflation, which has occurred on a limitedbasis in recent years, through control of expenses.  There is no assurance, however, thatinflation or deflation will not materially affect our operations in the future.

 

**LIQUIDITY ANDCAPITAL RESOURCES**

** **

Our cash requirementsconsist principally of:

 

•                  the funding of our accountsreceivable and merchandise purchases;

 

•                  capital expenditures for new storegrowth, store renovations and upgrades of our management information systems;

 

•                  debt service requirements;

 

•                  obligations related to our PensionPlan.

 

Our working capitalrequirements fluctuate during the year, increasing substantially during thefirst and second quarters of each fiscal year as a result of higher seasonallevels of accounts receivable and inventory.  We typically finance the increases in working capital needs during thefirst and second fiscal quarters with cash flows from operations, cash providedfrom the Credit Card Facility and borrowings under our $350 million unsecuredCredit Agreement.

 

Ourprimary sources of short-term liquidity are comprised of cash on hand andavailability under our Credit Agreement. As of January 29, 2005, we had cash and cash equivalents of $377.9million and no outstanding borrowings under our Credit Agreement.  Our cash and cash equivalents consistedprincipally of invested cash and store operating cash.  At January 31, 2004, we had cash andcash equivalents of $251.7 million and no outstanding borrowings under aprevious $300 million unsecured revolving credit facility.  The amount of cash on hand and borrowingsunder the credit facility are influenced by a number of factors, includingrevenues, accounts receivable and inventory levels, vendor terms, the level ofcapital expenditures, cash requirements related to financing instruments,Pension Plan funding obligations and tax payment obligations, among others.

 

Webelieve that operating cash flows, currently available vendor financing andamounts available pursuant to our Credit Agreement should be sufficient to fundour operations and debt service requirements, including repayment of the $225million Credit Card Facility, Pension Plan funding requirements, contractualobligations and commitments and currently anticipated capital expenditurerequirements through the end of 2005.  Inaddition, we are evaluating our options regarding the possible replacement ofthe Credit Card Facility which expires in September 2005.

 

We generated cash fromoperations, prior to changes in operating assets and liabilities, of $218.9million in 2005 compared

 

16

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to $190.5 million inprior year period.  This $28.4 millionincrease in cash generated from operations was due to higher sales and earningslevels realized in 2005.  Net cashprovided by operating activities was $76.1 million in 2005, reflecting thefunding of a $123.0 million seasonal increase in our accounts receivable andmerchandise inventories.  Both accountsreceivable and inventories were higher at the end of the second quarter of 2005compared to 2004 consistent with our higher sales levels.  In the presentation of net cash flows used byoperating activities in 2004 of $105.5 million in the accompanying statement ofcash flows, the cash generated from operations was reduced by the increase inaccounts receivable from $22.6 million at August 2, 2003 to $321.0 millionat January 31, 2004.  This increasein accounts receivable is attributable primarily to the discontinuance ofOff-Balance Sheet Accounting beginning in December 2003, as more fullydescribed in Note 6 of the Notes to Condensed Consolidated FinancialStatements.

 

Net cash used forinvesting activities was $66.6 million in 2005 compared to $25.0 million netprovided by investing activities in the prior year period.  The increase in cash used for investingactivities in 2005 was primarily due to a higher level of capital expendituresin 2005, offset by $14.4 million of proceeds from the sale of Chef’s Catalog in2005, and the impact of the discontinuance of Off-Balance Sheet Accountingwhich increased investing cash flows in 2004 by $77.9 million.

 

Capital expenditures were$81.0 million in 2005 and $52.9 million in the prior year period.  We incurred capital expenditures in thesecond quarter of 2005 related to the ongoing construction of new stores in SanAntonio, Texas and Boca Raton, Florida and the remodels of our San Francisco,Houston, Los Angeles and Newport Beach stores. We currently project capital expenditures for 2005 to be approximately $170million to $180 million primarily for new store construction, store renovationsand upgrades to information systems, including warehousing systems to supportour Direct Marketing operation and a new human capital management system.  We are currently remodeling our stores inNewport Beach, Los Angeles, San Francisco and Houston.  We expect to complete the expansion andrenovation of the Newport Beach and Los Angeles stores in the spring of fiscalyear 2005 and the San Francisco and Houston stores in the spring of fiscal year2006.  We expect to open our San Antonioand Boca Raton stores in the first quarter of fiscal year 2006.

 

**FinancingStructure**

 

Our major sources of funds are comprisedof vendor financing, the $350 million unsecured Credit Agreement, the $225million Credit Card Facility, $125 million senior unsecured notes, $125 millionsenior unsecured debentures, operating leases and capital leases.

 

At January 29, 2005, we had $225.0million borrowings under our Credit Card Facility.  Repayment of this obligation begins in April 2005in six monthly installments of $37.5 million. Borrowings pursuant to the Credit Card Facility bear interest at thecontractually-defined rate of one month LIBOR plus 0.27 percent (2.75 percent atJanuary 29, 2005) and are payable monthly to the holders of the Class ACertificates.  We are evaluating ouroptions regarding the possible replacement of the Credit Card Facility whichexpires in September 2005.

 

In the second quarter of 2005, our Boardof Directors increased our quarterly cash dividend to $0.15 per share from$0.13 per share in the prior year quarter. We declared dividends on January 28, 2005 aggregating $7.3million.  These dividends were paid in February 2005.

 

In prior years, our Boardof Directors authorized various stock repurchase programs and increases in thenumber of shares subject to repurchase. In the second quarter of 2005, we repurchased 4,100 shares at an averageprice of $57.60. As of January 29, 2005, approximately 1.2 million sharesremain available for repurchase under the stock repurchase programs.

 

**Off-BalanceSheet Arrangements**

 

Pursuant to a revolvingCredit Card Facility, we transfer substantially all of our credit cardreceivables to a wholly-owned subsidiary, Neiman Marcus Funding Corporation,which in turn sells such receivables to the Neiman Marcus Credit Card MasterTrust (Trust).  At the inception of theCredit Card Facility in September 2000, the Trust issued certificatesrepresenting undivided interests in the credit card receivables to third-partyinvestors in the face amount of $225 million (Sold Interests).  We hold certificates representing interestsin the credit card portfolio equal to the excess of the balance of the creditcard portfolio over $225 million (Retained Interests).  In order to maintain the committed level ofsecuritized assets, the Trust uses cash collections on the securitizedreceivables to purchase new credit card balances from us in accordance with theterms of the Credit Card Facility. Beginning in April 2005, cash collections will be used by the Trustto repay the $225 million principal balance of the Class A Certificates in sixmonthly installments of $37.5 million.

 

17

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From the inception of theCredit Card Facility until December 2003, our transfers and sales ofcredit card receivables pursuant to the terms of the Credit Card Facility wereaccounted for as sales (Off-Balance Sheet Accounting).  As a result, we removed the $225 million ofcredit card receivables sold from our balance sheet at the inception of theCredit Card Facility and our $225 million repayment obligation to the holdersof the certificates representing the Sold Interests was not required to beshown as a liability on our consolidated balance sheet.  During the period the transfers and salesqualified for Off-Balance Sheet Accounting, the Retained Interests were shownas “Undivided interests in NMG Credit Card Master Trust” on our consolidatedbalance sheets.

 

Beginning in December 2003,our transfers to the Trust ceased to qualify for Off-Balance SheetAccounting.  Rather, credit cardreceivables transferred to the Trust after November 2003 remain on ourbalance sheet and are recorded as secured borrowings (Financing Accounting).  Our entire credit card portfolio is nowincluded in accounts receivable and the $225 million of outstanding borrowingsunder the Credit Card Facility are shown as a liability in our condensedconsolidated balance sheet.

 

Our securitization of credit cardreceivables is more fully described in Note 6 of the Notes to CondensedConsolidated Financial Statements.

 

**OTHER MATTERS**

 

## **Factors That May Affect FutureResults**

 

**Matters discussed in MD&Ainclude forward-looking statements.  Wemake these forward-looking statements based on our expectations and beliefsconcerning future events, as well as currently available data.  These forward-looking statements involve anumber of risks and uncertainties and, therefore, are not guarantees of futureperformance.  A variety of factors couldcause our actual results to differ materially from the anticipated or expectedresults expressed in our forward-looking statements.  Factors that could affect future performanceinclude, but are not limited, to:**

** **

**Political and General EconomicConditions**

** **

**•**                  current political and general economic conditions orchanges in such conditions;

** **

**•**                  terrorist activities in the United States;

** **

**•**                  political, social, economic, or other eventsresulting in the short or long-term disruption in business at our stores,distribution centers or offices;

** **

**Customer Demographic Issues**

** **

**•**                  changes in the demographic or retail environment;

** **

**•**                  changes in consumer confidence resulting in areduction of discretionary spending on goods that are, or are perceived to be, “luxuries”;

** **

**•**                  changes in consumer preferences or fashion trends;

** **

**•**                  changes in our relationships with key customers;

** **

**•**                  changes in our proprietary credit card arrangementthat adversely impact our ability to provide consumer credit;

** **

**Merchandise Procurement and SupplyChain Considerations**

** **

**•**                  changes in our relationships with designers, vendorsand other sources of merchandise, including adverse changes in their financialviability;

** **

**•**                  delays in receipt of merchandise ordered due to workstoppages and/or other causes of delay in connection with either themanufacture or shipment of such merchandise;

** **

**•**                  changes in foreign currency exchange rates;

** **

**•**                  significant increases in paper, printing and postagecosts;

** **

**18**

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** **

**Industry and Competitive Factors**

** **

**•**                  competitive responses to our marketing,merchandising and promotional efforts and/or inventory liquidations by vendorsor other retailers;

** **

**•**                  seasonality of the retail business;

** **

**•**                  adverse weather conditions or natural disasters,particularly during peak selling seasons;

** **

**•**                  delays in anticipated store openings andrenovations;

** **

**Employee Considerations**

** **

**•**                  changes in key management personnel;

** **

**•**                  changes in our relationships with certain of our keysales associates;

** **

**Legal and Regulatory Issues**

** **

**•**                  changes in government or regulatory requirementsincreasing our costs of operations;

** **

**•**                  litigation that may have an adverse effect on ourfinancial results or reputation;

** **

**Other Factors**

** **

**•**                  impact of funding requirements related to ournoncontributory defined benefit pension plan;

** **

**•**                  the design and implementation of new informationsystems as well as enhancements of existing systems.

** **

**We undertake no obligation to update or revise (publicly orotherwise) any forward-looking statements to reflect subsequent events, newinformation or future circumstances.**

** **

**Critical AccountingPolicies**

** **

The preparation ofcondensed financial statements in conformity with generally accepted accountingprinciples requires  us  to make estimates and assumptions aboutfuture events.  These estimates andassumptions affect amounts of assets, liabilities, revenues and expenses andthe disclosure of gain and loss contingencies at the date of the Condensed ConsolidatedFinancial Statements.  Our currentestimates are subject to change if different assumptions as to the outcome offuture events were made.  We evaluate ourestimates and judgments on an ongoing basis and predicate those estimates andjudgments on historical experience and on various other factors that we believeare reasonable under the circumstances. We make adjustments to our assumptions and judgments when facts andcircumstances dictate.  Since future eventsand their effects cannot be determined with absolute certainty, actual resultsmay differ from the estimates we used in preparing the accompanying CondensedConsolidated Financial Statements.

 

**See Note 1 of the Notes toCondensed Consolidated Financial Statements in Item 1 for a summary of ourcritical accounting policies.  A completedescription of our critical accounting policies is included in our AnnualReport to Shareholders on Form 10-K for the fiscal year ended July 31,2004.**

** **

***Reclassification– Loyalty Programs*.** As more fully described in Note 1, a substantial portion of the pointsearned by customers in connection with our loyalty programs are redeemed forgift cards.  At the time the qualifyingsales giving rise to the loyalty program points are made, we defer the portionof the revenues on the qualifying sales transactions equal to our estimate ofthe retail value of the gift cards to be issued upon conversion of the pointsto gift cards.   Beginning in the firstquarter of 2005, we began to record the deferral of revenues related to giftcard awards under our loyalty programs as a reduction of revenues. Previously,we charged such amounts to selling, general and administrative expenses.  In addition, we now charge the cost of allother awards under our loyalty programs to cost of goods sold rather thanSG&A.  These changes inclassification do not impact the previously reported operating earnings, netincome or earnings per share amounts.

 

***Reclassification– Construction Allowances. ***Weperiodically receive allowances from developers related to the construction ofour stores.  We have historicallyrecorded these allowances as a reduction of our capital expenditures and, as

 

19

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a result, the carryingvalues of our property and equipment. Like other retailers, we have recently reviewed our accounting forleases and after consultation with Deloitte & Touche LLP, our independentregistered public accounting firm, we have changed the classification of thesedeveloper funds from a reduction of property and equipment to deferred realestate credits on our balance sheet. These deferred real estate credits are amortized over the lease termwhich is consistent with the amortization period for the constructedassets.  As a result of the change inclassification, property and equipment and long-term liabilities have beenincreased by $69 million at January 29, 2005 and $73 million at January 31,2004.

 

***Changesin Comparable Revenues.*** As more fully described in Note 2, we have sold our Chef’s Catalogoperations.  The changes in comparablerevenues have been adjusted 1) to exclude the revenues of Chef’s Catalogoperations for all periods prior to the sale and 2) to give recognition to thechange in classification of revenues deferred in connection with our loyaltyprograms and are summarized below:

 
| ** **            | ** ** | **Total** | ** ** | **Specialty  Retail Stores** | ** ** | **Direct  Marketing** | ** ** |
|-----------------------|------------|-----------|------------|------------------------------|------------|-----------------------|------------|
|                  |       |      |       |                         |       |                  |       |
| **Fiscal Year 2004:** |       |      |       |                         |       |                  |       |
| First quarter         |       | 10.9      | %          | 9.6                          | %          | 13.2                  | %          |
| Second quarter        |       | 12.7      | %          | 10.2                         | %          | 25.7                  | %          |
| Third quarter         |       | 22.0      | %          | 22.2                         | %          | 14.4                  | %          |
| Fourth quarter        |       | 12.6      | %          | 11.3                         | %          | 21.7                  | %          |
| Fiscal year 2004      |       | 14.4      | %          | 13.1                         | %          | 19.2                  | %          |
|                  |       |      |       |                         |       |                  |       |
| **Fiscal Year 2003:** |       |      |       |                         |       |                  |       |
| First quarter         |       | 6.3       | %          | 5.0                          | %          | 15.7                  | %          |
| Second quarter        |       | 0.9       | %          | (2.1                         | )%         | 18.7                  | %          |
| Third quarter         |       | 1.6       | %          | (0.6                         | )%         | 14.8                  | %          |
| Fourth quarter        |       | 9.0       | %          | 6.3                          | %          | 22.3                  | %          |
| Fiscal year 2003      |       | 4.1       | %          | 1.8                          | %          | 17.8                  | %          |

 

20

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**ITEM 3.****               QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The market risk inherentin our financial instruments represents the potential loss arising from adversechanges in interest rates and foreign currency exchange rates.  We do not enter into derivative financialinstruments for trading purposes.  Weseek to manage exposure to adverse interest rate changes through our normaloperating and financing activities. We are exposed to interest rate riskthrough our securitization and borrowing activities, which are described inNotes 2 and 5 to our Consolidated Financial Statements in our Annual Report onForm 10-K for the fiscal year ended July 31, 2004.

 

As of January 29,2005, we had no borrowings outstanding under our Credit Agreement.  Future borrowings under our Credit Agreement,to the extent of outstanding borrowings, would be affected by interest ratechanges.

 

Our outstanding long-termdebt as of January 29, 2005 is at fixed interest rates and would not beaffected by interest rate changes.  Basedupon quoted prices, the fair value of our senior notes and debentures (facevalue of $250 million) was $276.4 million as of January 29, 2005.

 

Pursuant to ourproprietary credit card securitization program that begins to expire in September 2005,we have sold substantially all of our credit card receivables through asubsidiary in exchange for certificates representing undivided interests insuch receivables.  We sold the Class ACertificates, which have an aggregate principal value of $225 million, toinvestors. The holders of the Class A Certificates are entitled to monthlyinterest distributions from the Trust at the contractually-defined rate of onemonth LIBOR plus 0.27 percent annually. The distributions to the Class A Certificate holders are payable fromthe finance charge income generated by the credit card receivables held by theTrust.  At January 29, 2005, weestimate a 100 basis point increase in LIBOR would result in an approximateannual increase of $2.25 million in the interest distributions to the Class ACertificate Holders.

 

We use derivativefinancial instruments to manage foreign currency risk related to theprocurement of merchandise inventories from foreign sources.  We enter into foreign currency contractsdenominated in the euro and British pound. We had foreign currency contracts inthe form of forward exchange contracts in the amount of approximately $42.3million as of January 29, 2005.  Themarket risk inherent in these instruments was not material to our consolidatedfinancial position, results of operations or cash flows in the second quarterof 2005.

 

**The effects of changes in the U.S. equity and bond marketsserve to increase or decrease the value of Pension Plan assets, resulting in anincrease or decrease in our cash funding obligation.  We seek to manage exposure to adverse equityand bond returns by maintaining diversified investment portfolios and utilizingprofessional investment managers.**

** **

Basedon a review of our financial instruments outstanding at January 29, 2005that are sensitive to market risks, we have determined that there was nomaterial market risk exposure to our consolidated financial position, resultsof operations, or cash flows as of such date.

 

**ITEM 4.****              ****CONTROLS AND PROCEDURES**

 

In accordance withExchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under thesupervision and with the participation of the Chief Executive Officer and ChiefFinancial Officer, as well as other key members of our management, of theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report. Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective, as of the end of the period covered by this report,to provide reasonable assurance that information we are required to disclose inour reports filed or submitted under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms.

 

In the ordinary course ofbusiness, we routinely enhance our information systems by either upgrading ourcurrent systems or implementing new systems. No change in our internal controls occurred during the quarter ended January 29,2005 that has materially affected, or is reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

21

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**THE NEIMAN MARCUS GROUP, INC.**

 

**PART II**

 

**ITEM 1.****               LEGALPROCEEDINGS**

 

We are involved invarious suits and claims in the ordinary course of business.  We do not believe that the disposition of anysuch suits or claims will have a material adverse effect upon our consolidatedresults of operations, cash flows or financial position.  This belief is subject to the risks anduncertainties discussed in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Factors That May Affect Future Results.”

 

###### **ITEM 2.**               UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS

###### ** **

The following table indicates ourrepurchases of equity securities in the second quarter of 2005:

 
| **Second Quarter 2005**                    | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price Paid  Per Share** | ** ** | **Total Number  of Shares  Purchased as  Part of  Publicly  Announced  Plans or  Programs** | ** ** | **Maximum  Number of  Shares that  May Yet Be  Purchased  under the  Plans or  Programs** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
|                                       |       |                                   |       |                               |       |                                                                                        |       |                                                                                      |       |
| November 2004  (10/31/04 to 11/27/04) |       | 4,100                                  |       | $                                  | 57.60      |                                                                                        | 4,100      |                                                                                      | 1,155,869  |   |
|                                       |       |                                   |       |                               |       |                                                                                        |       |                                                                                      |       |
| December 2004  (11/28/04 to 1/1/05)   |       | —                                 |       | —                             |       | —                                                                                      |       | 1,155,869                                                                                 |       |
|                                       |       |                                   |       |                               |       |                                                                                        |       |                                                                                      |       |
| January 2005  (1/2/05 to 1/29/05)     |       | —                                 |       | —                             |       | —                                                                                      |       | 1,155,869                                                                                 |       |
|                                            |            |                                        |            |                                    |            |                                                                                             |            |                                                                                           |            |  |

 

**ITEM 4.****               SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

The 2005 Annual Meetingof Shareholders of the Company was held on January 14, 2005.

 

A total of 40,092,938 ofthe Company’s shares were present or represented by proxy at the meeting.  This represented more than 82 percent of theCompany’s total shares outstanding including 23,832,013 shares of Class ACommon Stock and 16,260,925 shares of Class B Common Stock.

 

Four Class B directorsstood for re-election at the Company’s 2005 Annual Meeting.  Only holders of the Company’s Class B CommonStock are entitled to vote for Class B directors.  In all other matters submitted to a vote ofthe shareholders at the annual meeting, holders of Class A Common Stock andClass B Common Stock voted as a single class.

 

The individuals namedbelow were re-elected to a three-year term as Class II Directors:

 
| **Name**         | ** ** | **Votes  Cast For** | ** ** | **Votes  Withheld** | ** ** |
|------------------|------------|---------------------|------------|---------------------|------------|
|             |       |                |       |                |       |
| Walter J. Salmon |       | 15,998,036          |       | 45,498              |       |
| Matina S. Horner |       | 15,998,164          |       | 45,370              |       |
| Brian J. Knez    |       | 15,986,501          |       | 57,033              |       |
| Carl Sewell      |       | 16,003,301          |       | 40,233              |       |

 

22

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Richard A. Smith, RobertA. Smith, Paula Stern, Gary L. Countryman, Vincent M. O’Reilly, John R. Cook,and Burton M. Tansky all continue as directors of the Company.

 

The election of Deloitte& Touche, LLP as independent registered public accountants was ratified,with 39,831,525 shares voting for, 220,934 shares voting against, and 40,477shares abstaining.

 

The Company’s 2005 StockIncentive Plan was approved with 32,266,271 shares voting for, 4,488,490 sharesvoting against, 348,727 shares abstaining, and 2,989,450 broker non-votes.

 

The shareholder proposalconcerning cumulative voting was defeated, with 13,977,286 voting for,20,980,193 shares voting against, 2,146,372 shares abstaining, and 2,989,087broker non-votes.

 

**ITEM 6.****               EXHIBITS**

 
| 3.1    |   | Restated  Certificate of Incorporation of the Company, incorporated herein by reference  to the Company’s Quarterly Report on Form 10-Q for the quarter ended January 26,  2002.                                                                                                                                       |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                             |
| 3.2    |   | Bylaws of the  Company, incorporated herein by reference to the Company’s Annual Report on  Form 10-K for the fiscal year ended August 2, 2003.                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                             |
| 4.1    |   | Certificates of  Designation with respect to Series A Junior Participating Preferred Stock,  Series B Junior Participating Preferred Stock and Series C Junior  Participating Preferred Stock, incorporated herein by reference to the  Company’s Annual Report on Form 10-K for the fiscal year ended July 31,  2004. |
|   |   |                                                                                                                                                                                                                                                                                                                             |
| 4.2    |   | Indenture, dated  as of May 27, 1998, between the Company and The Bank of New York, as trustee  (the “Indenture”), incorporated herein by reference to the Company’s Annual  Report on Form 10-K for the fiscal year ended July 31, 2004.                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                             |
| 4.3    |   | Form of 6.65  percent Senior Note Due 2008, dated May 27, 1998, issued by the Company  pursuant to the Indenture, incorporated herein by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended July 31, 2004.                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                             |
| 4.4    |   | Form of 7.125  percent Senior Note Due 2008, dated May 27, 1998, issued by the Company  pursuant to the Indenture, incorporated herein by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended July 31, 2004.                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                             |
| 4.5    |   | Amended and  Restated Rights Agreement, dated as of August 8, 2002, between the  Company and Mellon Investor Services LLC, as Rights Agent, incorporated herein  by reference to the Company’s Annual Report on Form 10-K for the fiscal year  ended August 3, 2002.                                              |
|   |   |                                                                                                                                                                                                                                                                                                                             |
| 10.42* |   | Base salaries of  named executive officers for fiscal year 2005. (1)                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                             |
| 31.1   |   | Certification of  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. (1)                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                             |
| 31.2   |   | Certification of  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. (1)                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                             |
| 32     |   | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. (1)                                                                                                                                                                                      |

 

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(1)                                  Filedherewith

 

*                                         Managementcontract or compensatory plan or arrangement.

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersignedhereunto duly authorized.

 

 

THE NEIMAN MARCUS GROUP, INC.

(Registrant)

 
| **Signature**          | ** ** | **Title** | ** **                                                                                  | **Date** |
|------------------------|------------|-----------|---------------------------------------------------------------------------------------------|----------|
|                   |       |      |                                                                                        |     |
| /s/ T. Dale  Stapleton |       |      | Vice President  and Controller  and Duly Authorized Officer  (principal accounting officer) |     | March 7,  2005 |
| T. Dale  Stapleton     |       |      |
|                        |            |           |                                                                                             |          |  |

 

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