**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

| **ý****        QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                    | ** ** | ** ** |
| For the Quarterly Period Ended May 1, 2004                                                                                                              |
| ** **                                                                                                                                              |
| **OR**                                                                                                                                                  |
|                                                                                                                                                    |   |   |
| **o****        TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**     |

 

**Commission file****no. 1-9659**

 

**TheNeiman Marcus Group, Inc.**

(Exactname 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 whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

| YES   ý |   | NO   o |
|-----------------------------|--------|-----------------------|

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

 

| YES   ý |   | NO   o |
|-----------------------------|--------|-----------------------|

 

As of June 1, 2004, thenumber of outstanding shares of each of the issuer’s classes of common stockwas:

 
| **Class**                             | ** ** | **Outstanding Shares** |
|---------------------------------------|------------|------------------------|
| Class A Common Stock, $.01 Par  Value |       | 29,341,253             |
| Class B Common Stock, $.01 Par  Value |       | 19,941,833             |

 

 

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**THE NEIMAN MARCUS GROUP,INC.**

 

**INDEX**

 
| Part I.    | Financial Information |                                                                                                                           |
|------------|-----------------------|--------------------------------------------------------------------------------------------------------------------------------|
|       |                  |                                                                                                                           |   |
|       | Item 1.               | Condensed  Consolidated Balance Sheets as of May 1, 2004, August 2, 2003 and May 3,  2003                                 |   |
|       |                  |                                                                                                                           |   |
|       |                  | Condensed  Consolidated Statements of Earnings for the Thirteen Weeks and Thirty-Nine  Weeks Ended May 1, 2004 and May 3, 2003 |   |
|       |                  |                                                                                                                           |   |
|       |                  | Condensed  Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended May 1,  2004 and May 3, 2003                  |   |
|       |                  |                                                                                                                           |   |
|       |                  | 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 4.               | Submission of Matters to a  Vote of Security Holders                                                                           |   |
|       |                  |                                                                                                                           |   |
|       | Item 6.               | Exhibits and Reports on Form 8-K                                                                                               |   |
|       |                  |                                                                                                                           |   |
| Signatures |

 

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**THE NEIMAN MARCUS GROUP,INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

 
| **(in  thousands)**                                                                                                | ** ** | **May 1,  2004** | ** ** | **August 2,  2003** | ** ** | **May 3,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|-----------------------|------------|
|                                                                                                               |       |                  |       |                     |       |                  |       |
| **ASSETS**                                                                                                         |       |                  |       |                     |       |                  |       |
| Current assets:                                                                                                    |       |                  |       |                     |       |                  |       |
| Cash and cash equivalents                                                                                          |       | $                     | 311,985    |                     | $          | 206,950               |       | $ | 133,670 |   |
| Undivided interests in NMG Credit Card Master Trust                                                                |       | —                |       | 243,145                  |       | 279,556               |       |
| Accounts receivable, net                                                                                           |       | 599,581               |       | 22,595                   |       | 25,132                |       |
| Merchandise inventories                                                                                            |       | 715,539               |       | 687,062                  |       | 719,118               |       |
| Other current assets                                                                                               |       | 46,372                |       | 86,369                   |       | 58,681                |       |
| Total current assets                                                                                               |       | 1,673,477             |       | 1,246,121                |       | 1,216,157             |       |
|                                                                                                               |       |                  |       |                     |       |                  |       |
| Property and equipment, net                                                                                        |       | 685,928               |       | 674,185                  |       | 676,059               |       |
| Other assets                                                                                                       |       | 104,158               |       | 114,124                  |       | 107,851               |       |
| Total assets                                                                                                       |       | $                     | 2,463,563  |                     | $          | 2,034,430             |       | $ | 2,000,067 |   |
|                                                                                                               |       |                  |       |                     |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                     |       |                  |       |                     |       |                  |       |
| Current liabilities:                                                                                               |       |                  |       |                     |       |                  |       |
| Notes payable and current maturities of long-term liabilities                                                      |       | $                     | 1,237      |                     | $          | 1,241                 |       | $ | 1,799 |   |
| Current portion of borrowings under Credit Card Facility                                                           |       | 37,500                |       | —                   |       | —                |       |
| Accounts payable                                                                                                   |       | 234,264               |       | 262,909                  |       | 224,945               |       |
| Accrued liabilities                                                                                                |       | 316,305               |       | 266,259                  |       | 293,145               |       |
| Total current liabilities                                                                                          |       | 589,306               |       | 530,409                  |       | 519,889               |       |
|                                                                                                               |       |                  |       |                     |       |                  |       |
| Long-term liabilities:                                                                                             |       |                  |       |                     |       |                  |       |
| Notes and debentures                                                                                               |       | 249,751               |       | 249,733                  |       | 249,727               |       |
| Borrowings under Credit Card Facility                                                                              |       | 187,500               |       | —                   |       | —                |       |
| Other long-term liabilities                                                                                        |       | 97,307                |       | 108,234                  |       | 87,530                |       |
| Total long-term liabilities                                                                                        |       | 534,558               |       | 357,967                  |       | 337,257               |       |
|                                                                                                               |       |                  |       |                     |       |                  |       |
| Minority interest                                                                                                  |       | 12,799                |       | 8,206                    |       | 9,462                 |       |
|                                                                                                               |       |                  |       |                     |       |                  |       |
| Common stocks                                                                                                      |       | 493                   |       | 479                      |       | 482                   |       |
| Additional paid-in capital                                                                                         |       | 484,151               |       | 458,520                  |       | 447,456               |       |
| Accumulated other comprehensive loss                                                                               |       | (26,752               | )          | (25,573                  | )          | (11,729               | )          |
| Retained earnings                                                                                                  |       | 891,054               |       | 719,442                  |       | 712,270               |       |
| Treasury stock, at cost (699,777 shares at May 1, 2004 and 524,177  shares at August 2, 2003 and May 3, 2003) |       | (22,046               | )          | (15,020                  | )          | (15,020               | )          |
| Total shareholders’ equity                                                                                    |       | 1,326,900             |       | 1,137,848                |       | 1,133,459             |       |
| Total liabilities and shareholders’ equity                                                                    |       | $                     | 2,463,563  |                     | $          | 2,034,430             |       | $ | 2,000,067 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

1

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**THE NEIMAN MARCUS GROUP,INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFEARNINGS**

**(UNAUDITED)**

 
| ** **                                                                          | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in  thousands, except per share data)**                                          | ** ** | **May 1,  2004**         | ** ** | **May 3,  2003**            | ** ** | **May 1,  2004** | ** ** | **May 3,  2003** | ** ** |
|                                                                                |       |                     |       |                        |       |   |   |   |   |
| Revenues                                                                            |       | $                        | 877,576    |                        | $          | 722,917 |   | $ | 2,756,563 |   | $ | 2,395,467 |   |
|                                                                                |       |                     |       |                        |       |   |   |   |   |
| Cost of goods sold including buying and occupancy costs                             |       | 543,275                  |       | 463,713                     |       | 1,768,852 |   | 1,572,222 |   |
| Selling, general and administrative expenses                                        |       | 214,706                  |       | 187,372                     |       | 680,827 |   | 617,765 |   |
|                                                                                |       |                     |       |                        |       |   |   |   |   |
| Operating earnings                                                                  |       | 119,595                  |       | 71,832                      |       | 306,884 |   | 205,480 |   |
|                                                                                |       |                     |       |                        |       |   |   |   |   |
| Interest expense, net                                                               |       | 4,589                    |       | 4,245                       |       | 11,814 |   | 12,183 |   |
| Earnings before income taxes, minority interest and change in  accounting principle |       | 115,006                  |       | 67,587                      |       | 295,070 |   | 193,297 |   |
| Income taxes                                                                        |       | 44,852                   |       | 26,020                      |       | 107,576 |   | 74,419 |   |
| Earnings before minority interest and change in accounting principle                |       | 70,154                   |       | 41,567                      |       | 187,494 |   | 118,878 |   |
| Minority interest in net earnings of subsidiaries                                   |       | (1,305                   | )          | (437                        | )          | (3,249 | ) | (1,946 | ) |
|                                                                                |       |                     |       |                        |       |   |   |   |   |
| Earnings before change in accounting principle                                      |       | 68,849                   |       | 41,130                      |       | 184,245 |   | 116,932 |   |
|                                                                                |       |                     |       |                        |       |   |   |   |   |
| Change in accounting principle – writedown of intangible assets, net of  taxes |       | —                   |       | —                      |       | — |   | (14,801 | ) |
| Net earnings                                                                        |       | $                        | 68,849     |                        | $          | 41,130 |   | $ | 184,245 |   | $ | 102,131 |   |
|                                                                                |       |                     |       |                        |       |   |   |   |   |
| Weighted average number of common and common equivalent shares  outstanding:        |       |                     |       |                        |       |   |   |   |   |
| Basic                                                                               |       | 48,208                   |       | 47,240                      |       | 47,929 |   | 47,498 |   |
| Diluted                                                                             |       | 49,124                   |       | 47,497                      |       | 48,806 |   | 47,772 |   |
|                                                                                |       |                     |       |                        |       |   |   |   |   |
| Basic earnings per share:                                                           |       |                     |       |                        |       |   |   |   |   |
| Earnings before change in accounting principle                                      |       | $                        | 1.43       |                        | $          | 0.87 |   | $ | 3.84 |   | $ | 2.46 |   |
| Change in accounting principle – writedown of intangible assets, net of  taxes |       | —                   |       | —                      |       | — |   | (0.31 | ) |
| Basic earnings per share                                                            |       | $                        | 1.43       |                        | $          | 0.87 |   | $ | 3.84 |   | $ | 2.15 |   |
|                                                                                |       |                     |       |                        |       |   |   |   |   |
| Diluted earnings per share:                                                         |       |                     |       |                        |       |   |   |   |   |
| Earnings before change in accounting principle                                      |       | $                        | 1.40       |                        | $          | 0.87 |   | $ | 3.78 |   | $ | 2.45 |   |
| Change in accounting principle – writedown of intangible assets, net of  taxes |       | —                   |       | —                      |       | — |   | (0.31 | ) |
| Diluted earnings per share                                                          |       | $                        | 1.40       |                        | $          | 0.87 |   | $ | 3.78 |   | $ | 2.14 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

2

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**THE NEIMAN MARCUS GROUP,INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(UNAUDITED)**

 
| ** **                                                                                         | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in  thousands)**                                                                                | ** ** | **May 1,  2004**            | ** ** | **May 3,  2003** | ** ** |
|                                                                                               |       |                        |       |   |   |
| **CASH FLOWS - OPERATING  ACTIVITIES**                                                             |       |                        |       |   |   |
| Net earnings                                                                                       |       | $                           | 184,245    |   | $ | 102,131 |   |
| Change in accounting – non-cash writedown of intangible assets, net of  taxes                 |       | —                      |       | 14,801 |   |
| Earnings before change in accounting principle                                                     |       | 184,245                     |       | 116,932 |   |
| Adjustments to reconcile net earnings to net cash (used for) provided  by operating activities:    |       |                        |       |   |   |
| Depreciation                                                                                       |       | 69,163                      |       | 57,924 |   |
| Minority interest                                                                                  |       | 3,249                       |       | 1,946 |   |
| Other – primarily costs related to defined benefit pension and other  long-term benefit plans |       | 24,367                      |       | 14,168 |   |
|                                                                                               |       | 281,024                     |       | 190,970 |   |
| Changes in operating assets and liabilities:                                                       |       |                        |       |   |   |
| Increase in accounts receivable                                                                    |       | (576,986                    | )          | (5,354 | ) |
| Increase merchandise inventories                                                                   |       | (28,477                     | )          | (62,274 | ) |
| Decrease in other current assets                                                                   |       | 27,803                      |       | 4,125 |   |
| Increase in accounts payable and accrued liabilities                                               |       | 35,347                      |       | 21,156 |   |
| Funding of defined benefit pension plan                                                            |       | (30,000                     | )          | (30,760 | ) |
| **NET CASH (USED FOR) PROVIDED BY  OPERATING ACTIVITIES**                                          |       | (291,289                    | )          | 117,863 |   |
|                                                                                               |       |                        |       |   |   |
| **CASH FLOWS - INVESTING  ACTIVITIES**                                                             |       |                        |       |   |   |
| Capital expenditures                                                                               |       | (80,906                     | )          | (80,817 | ) |
| Transactions related to undivided interests in NMG Credit Card Master  Trust:                      |       |                        |       |   |   |
| Purchases of held-to-maturity securities                                                           |       | (240,808                    | )          | (747,396 | ) |
| Maturities of held-to-maturity securities                                                          |       | 483,373                     |       | 678,003 |   |
| **NET CASH PROVIDED BY (USED FOR)  INVESTING ACTIVITIES**                                          |       | 161,659                     |       | (150,210 | ) |
|                                                                                               |       |                        |       |   |   |
| **CASH FLOWS - FINANCING  ACTIVITIES**                                                             |       |                        |       |   |   |
| Proceeds from borrowings                                                                           |       | 2,000                       |       | 81,051 |   |
| Repayment of debt                                                                                  |       | (1,500                      | )          | (80,000 | ) |
| Borrowings under Credit Card Facility                                                              |       | 225,000                     |       | — |   |
| Acquisitions of treasury stock                                                                     |       | (7,026                      | )          | (15,020 | ) |
| Proceeds from exercises of stock options and restricted stock grants                               |       | 23,235                      |       | 1,642 |   |
| Cash dividends paid                                                                                |       | (6,312                      | )          | — |   |
| Distributions paid                                                                                 |       | (732                        | )          | (294 | ) |
| **NET CASH PROVIDED BY (USED FOR)   FINANCING ACTIVITIES**                                    |       | 234,665                     |       | (12,621 | ) |
|                                                                                               |       |                        |       |   |   |
| **CASH AND CASH EQUIVALENTS**                                                                      |       |                        |       |   |   |
| Increase (decrease) during the period                                                              |       | 105,035                     |       | (44,968 | ) |
| Beginning balance                                                                                  |       | 206,950                     |       | 178,638 |   |
| Ending balance                                                                                     |       | $                           | 311,985    |   | $ | 133,670 |   |
|                                                                                               |       |                        |       |   |   |
| **SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION**                                            |       |                        |       |   |   |
| Cash paid during the period for:                                                                   |       |                        |       |   |   |
| Interest                                                                                           |       | $                           | 9,050      |   | $ | 9,329 |   |
| Income taxes                                                                                       |       | $                           | 70,657     |   | $ | 42,489 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

3

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**THE NEIMAN MARCUS GROUP,INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

1.                                       Basis ofPresentation

 

The CondensedConsolidated Financial Statements of The Neiman Marcus Group, Inc. andsubsidiaries (the Company) have been prepared in accordance with generallyaccepted accounting principles for interim financial information and theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedfor complete financial statements. Therefore, the financial statements should be read in conjunction withthe Company’s Annual Report on Form 10-K for the fiscal year endedAugust 2, 2003.

 

The Company’sfiscal year ends on the Saturday closest to July 31.  All references to the third quarter of 2004relate to the thirteen weeks ended May 1, 2004 and all references to the thirdquarter of 2003 relate to the thirteen weeks ended May 3, 2003.  All references to 2004 relate to thethirty-nine weeks ended May 1, 2004 and all references to 2003 relate to thethirty-nine weeks ended May 3, 2003.

 

In the opinionof management, the accompanying unaudited condensed consolidated financialstatements contain all adjustments, consisting of normal recurring adjustments(as well as a change in accounting principle made in the first quarter of 2003as more fully described in Note 9) necessary to present fairly the financialposition, results of operations and cash flows of the Company 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.

 

The preparationof financial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions about futureevents.  These estimates and assumptionsaffect the amounts of assets, liabilities, revenues and expenses and thedisclosure of gain and loss contingencies at the date of the condensedconsolidated financial statements.

 

The Companyevaluates its estimates and judgments on an ongoing basis and predicates thoseestimates and judgments on historical experience and on various other factorsthat are believed to be reasonable under the circumstances.  Management makes adjustments to its assumptionsand judgments when facts and circumstances dictate.  Since future events and their effects cannotbe determined with absolute certainty, actual results may differ from theestimates used by the Company in preparing the accompanying condensed consolidatedfinancial statements.

 

Management ofthe Company believes the following critical accounting policies, among others,encompass the more significant judgments and estimates used in the preparationof its 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;

 

•                  Recognitionof income and expenses related to the Company’s securitization program;

 

•                  Determinationof impairment of long-lived assets;

 

•                  Recognitionof advertising and catalog costs;

 

•                  Recognitionof costs related to the Company’s loyalty programs;

 

•                  Recognitionof income taxes; and

 

•                  Measurementof accruals for litigation, general liability, workers’ compensation and healthinsurance as well as short-term disability, pension and postretirement healthcare benefits.

 

A description ofthe Company’s critical accounting policies is included in the Company’s AnnualReport on Form  10-Kfor the fiscal year ended August 2, 2003.

 

4

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***Stock-Based Compensation***.  The Company accounts for stock-basedcompensation awards to employees in accordance with Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations. Accordingly, no compensation expense has been recognized forstock options since all options granted had an exercise price equal to themarket value of the Company’s common stock on the grant date.

 

The followingtable illustrates the effect on net earnings and earnings per share as if theCompany had applied the fair value recognition provisions of SFAS No. 123to stock-based employee compensation using the Black-Scholes option-pricingmodel for the thirteen weeks and thirty-nine weeks ended May 1, 2004 and May 3,2003:

 
| ** **                                                                                                      | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in  thousands, except per share data)**                                                                      | ** ** | **May 1,  2004**         | ** ** | **May 3,  2003**            | ** ** | **May 1,  2004** | ** ** | **May 3,  2003** | ** ** |
|                                                                                                            |       |                     |       |                        |       |   |   |   |   |
| Net earnings:                                                                                                   |       |                     |       |                        |       |   |   |   |   |
| As reported                                                                                                     |       | $                        | 68,849     |                        | $          | 41,130 |   | $ | 184,245 |   | $ | 102,131 |   |
| Less: stock-based employee compensation expense determined under fair  value based method, net of related taxes |       | (2,210                   | )          | (2,095                      | )          | (6,411 | ) | (6,333 | ) |
| Pro forma                                                                                                       |       | $                        | 66,639     |                        | $          | 39,035 |   | $ | 177,834 |   | $ | 95,798 |   |
|                                                                                                            |       |                     |       |                        |       |   |   |   |   |
| Basic earnings per share:                                                                                       |       |                     |       |                        |       |   |   |   |   |
| As reported                                                                                                     |       | $                        | 1.43       |                        | $          | 0.87 |   | $ | 3.84 |   | $ | 2.15 |   |
| Pro forma                                                                                                       |       | $                        | 1.38       |                        | $          | 0.83 |   | $ | 3.71 |   | $ | 2.02 |   |
|                                                                                                            |       |                     |       |                        |       |   |   |   |   |
| Diluted earnings per share:                                                                                     |       |                     |       |                        |       |   |   |   |   |
| As reported                                                                                                     |       | $                        | 1.40       |                        | $          | 0.87 |   | $ | 3.78 |   | $ | 2.14 |   |
| Pro forma                                                                                                       |       | $                        | 1.36       |                        | $          | 0.82 |   | $ | 3.64 |   | $ | 2.01 |   |

 

The effects onpro forma net earnings and earnings per share of expensing the estimated fairvalue of stock options are not necessarily representative of the effects onreported net earnings for future periods due to such factors as the vestingperiods of stock options and the potential issuance of additional stock optionsin future years.  In addition, theBlack-Scholes option-pricing model has inherent limitations in calculating thefair value of stock options for which no active market exists since the modeldoes 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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2.                                       Operating Segments

 

The Company has identified two reportablesegments: Specialty Retail Stores and Direct Marketing.  The Specialty Retail Stores segment includesall Neiman Marcus and Bergdorf Goodman retail stores, including Neiman Marcusclearance stores.  The Direct Marketingsegment conducts both print catalog and online operations under the NeimanMarcus, Horchow and Chef’s Catalog brand names. Other includes the operations of Kate Spade LLC and Gurwitch Products,LLC (the Brand Development Companies) and corporate expenses.

 

The followingtable sets forth the information for the Company’s reportable segments:

 
| ** **              | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|-------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in  thousands)**     | ** ** | **May 1,  2004**         | ** ** | **May 3,  2003**            | ** ** | **May 1,  2004** | ** ** | **May 3,  2003** | ** ** |
|                    |       |                     |       |                        |       |   |   |   |   |
| REVENUES:               |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail Stores |       | $                        | 721,971    |                        | $          | 591,268 |   | $ | 2,230,071 |   | $ | 1,948,486 |   |
| Direct Marketing        |       | 126,204                  |       | 112,767                     |       | 445,694 |   | 388,401 |   |
| Other                   |       | 29,401                   |       | 18,882                      |       | 80,798 |   | 58,580 |   |
| Total                   |       | $                        | 877,576    |                        | $          | 722,917 |   | $ | 2,756,563 |   | $ | 2,395,467 |   |
|                    |       |                     |       |                        |       |   |   |   |   |
| OPERATING EARNINGS:     |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail Stores |       | $                        | 115,176    |                        | $          | 68,337 |   | $ | 279,084 |   | $ | 186,008 |   |
| Direct Marketing        |       | 9,842                    |       | 10,386                      |       | 45,226 |   | 35,787 |   |
| Other                   |       | (5,423                   | )          | (6,891                      | )          | (17,426 | ) | (16,315 | ) |
| Total                   |       | $                        | 119,595    |                        | $          | 71,832 |   | $ | 306,884 |   | $ | 205,480 |   |

 

3.                                       Cash DividendProgram

 

In the secondquarter of 2004, the Company’s Board of Directors initiated a quarterly cashdividend of $0.13 per share.  The Companydeclared dividends on January 30, 2004 and on April 30, 2004.  As of May 1, 2004, the Company had dividendspayable in the amount of $6.3 million (included in accrued liabilities in theaccompanying condensed consolidated balance sheet), which were paid in May2004.

 

4.                                       Stock RepurchaseProgram

 

In prior years,the Company’s Board of Directors authorized various stock repurchase programsand increases in the number of shares subject to repurchase.  During the first quarter of 2004, the Companyrepurchased 175,600 shares at an average purchase price of $40.01.  As of May 1, 2004, approximately 1.2 millionshares remain authorized for repurchase under the Company’s stock repurchaseprograms.

 

6

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5.                                       Earnings per Share

 

The weightedaverage shares used in computing basic and diluted earnings per share (EPS) arepresented in the table below.  Noadjustments were made to net earnings for the computations of basic and dilutedEPS during the periods presented.

 
| ** **                                            | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in thousands  of shares)**                         | ** ** | **May 1,  2004**         | ** ** | **May 3,  2003**            | ** ** | **May 1,  2004** | ** ** | **May 3,  2003** | ** ** |
|                                                  |       |                     |       |                        |       |   |   |   |   |
| Weighted average shares outstanding                   |       | 48,557                   |       | 47,530                      |       | 48,313 |   | 47,789 |   |
| Less: shares of non-vested restricted stock           |       | (349                     | )          | (290                        | )          | (384 | ) | (291 | ) |
| Shares for computation of basic EPS                   |       | 48,208                   |       | 47,240                      |       | 47,929 |   | 47,498 |   |
|                                                  |       |                     |       |                        |       |   |   |   |   |
| Effect of dilutive stock options and restricted stock |       | 916                      |       | 257                         |       | 877 |   | 274 |   |
| Shares for computation of diluted EPS                 |       | 49,124                   |       | 47,497                      |       | 48,806 |   | 47,772 |   |
|                                                  |       |                     |       |                        |       |   |   |   |   |
| Shares represented by antidilutive stock options      |       | —                   |       | 1,937                       |       | 9 |   | 1,950 |   |

 

Antidilutivestock options are not included in the computation of diluted EPS when theexercise price of those options is greater than the average market price of thecommon shares.

 

6.                                       UndividedInterests in NMG Credit Card Master Trust

 

Pursuant to arevolving credit card securitization program (the Credit Card Facility), the Company transfers substantially all of its 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) and to theCompany in an aggregate amount 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, cash collections on the securitized receivables are used bythe Trust to purchase new credit card balances from the Company in accordancewith the terms of the Credit Card Facility.

 

From itsinception until December 2003, the Company’s transfers and sales of creditcard receivables pursuant to the terms of the Credit Card Facility wereaccounted for as sales in accordance with generally accepted accountingprinciples (Off-Balance Sheet Accounting). As a result, $225 million of credit card receivables were removed fromthe Company’s balance sheet at the inception of the Credit Card Facility andthe Company’s $225 million repayment obligation to the holders of thecertificates representing the Sold Interests was not required to be shown as aliability on the Company’s balance sheet. During the period the transfers and sales qualified for Off-BalanceSheet Accounting, the Retained Interests were shown as “Undivided interests inNMG Credit Card Master Trust” on the Company’s condensed consolidated balancesheets.

 

Beginning inApril 2005, cash collections will be used by the Trust to repay the $225million principal balance of the Class A Certificatesin six monthly installments of $37.5 million (Amortization Period).  As a result of certain provisions in thesecuritization agreement, the Company holds certain rights to repurchase theClass A Certificates (Repurchase Option) subsequent tothe commencement of the Amortization Period and, therefore, has the ability toregain effective control over the credit card receivables held by the Trust atthe time the Repurchase Option becomes exercisable.  The Company believes that the RepurchaseOption will become exercisable in September 2005.

 

7

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Transfers to theTrust ceased to qualify for Off-Balance Sheet Accounting beginning inDecember 2003 since the contractual life of the receivables transferredafter November 2003 is estimated to extend to September 2005 when theRepurchase Option becomes exercisable. Rather, these transfers are recorded as secured borrowings by theCompany (Financing Accounting).  As aconsequence, the credit card receivables generated after November 2003remained on the Company’s balance sheet and the Company recorded a liabilityfor its repayment obligation to the holders of the $225 million of certificatesrepresenting the Sold Interests.  Thetransition period from Off-Balance Sheet Accounting to Financing Accounting(Transition Period) lasted approximately four months (December 2003 toMarch 2004).  During the TransitionPeriod, cash collections of receivables were allocated to the previous Sold Interestsand Retained Interests until such time as those balances were reduced to zero.

 

A reconciliationof the outstanding balance of the Company’s accounts receivables to thebalances recorded by the Company at May 1, 2004, August 2, 2003 and May 3,2003 is as follows:

 
| **(in millions)**                                                            | ** ** | **May 1,  2004** | ** ** | **August 2,  2003** | ** ** | **May 3,  2003** | ** ** |
|------------------------------------------------------------------------------|------------|------------------|------------|--------------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | ** **       | ** ** | ** **               | ** ** | ** **       | ** ** |
| Credit card receivables                                                      |       | $                | 569.5      |                     | $          | 468.1            |       | $ | 504.6 |   |
| Other receivables                                                            |       | 30.1             |       | 22.6                     |       | 25.1             |       |
|                                                                         |       | 599.6            |       | 490.7                    |       | 529.7            |       |
| Less: Sold Interests originally qualifying for Off-Balance Sheet  Accounting |       | —           |       | (225.0                   | )          | (225.0           | )          |
| Net balance                                                                  |       | $                | 599.6      |                     | $          | 265.7            |       | $ | 304.7 |   |
|                                                                         |       |             |       |                     |       |             |       |
| Amounts reflected in the Company’s balance sheet:                       |       |             |       |                     |       |             |       |
| Undivided interests in NMG Credit Card Master Trust                          |       | $                | —     |                     | $          | 243.1            |       | $ | 279.6 |   |
| Accounts receivable                                                          |       | 599.6            |       | 22.6                     |       | 25.1             |       |
|                                                                         |       | $                | 599.6      |                     | $          | 265.7            |       | $ | 304.7 |   |
|                                                                         |       |             |       |                     |       |             |       |
| Current portion of borrowings under Credit Card Facility                     |       | $                | 37.5       |                     | $          | —           |       | $ | — |   |
| Borrowings under Credit Card Facility                                        |       | 187.5            |       | —                   |       | —           |       |
|                                                                         |       | $                | 225.0      |                     | $          | —           |       | $ | — |   |

 

Upon completionof the Transition Period, the Company’s entire credit card portfolio wasincluded in accounts receivable in its condensed consolidated balance sheet andthe $225 million repayment obligation was shown as a liability.

 

As of the startof the Transition Period in December 2003, the carrying value of the RetainedInterests exceeded face value by approximately $7.6 million as a result of theapplication of the provisions of current accounting rules related to thecalculation of the gains on sale of the previously Sold Interests and thevaluation of both Sold and Retained Interests. During the Transition Period, the $7.6 million premium was amortized asa reduction of the Company’s net earnings from its credit card portfolio(recorded as a reduction of selling, general and administrative expenses in thecondensed consolidated statements of earnings). Of the $7.6 million premium, $5.3 million was amortized in the secondquarter of 2004 and the remaining $2.3 million was amortized in the thirdquarter of 2004.

 

8

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7.                                       EmployeeBenefit Plans

 

The Companysponsors a defined benefit pension plan (Pension Plan) covering substantiallyall full-time employees. The Company also sponsors an unfunded supplementalexecutive retirement plan (SERP Plan) that provides certain employeesadditional pension benefits.  Benefitsunder both plans are based on the employees’ years of service and compensationover defined periods of employment. Pension Plan assets consist primarily of equity and fixed incomesecurities.

 

Retirees and active employees hired prior to March 1, 1989 areeligible for certain limited postretirement health care benefits(Postretirement Plan) if they have met certain service and minimum agerequirements.

 

The componentsof pension expense for the Pension Plan are as follows:

 
| ** **                                                | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|-----------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in  thousands)**                                       | ** ** | **May 1,  2004**         | ** ** | **May 3,  2003**            | ** ** | **May 1,  2004** | ** ** | **May 3,  2003** | ** ** |
|                                                      |       |                     |       |                        |       |   |   |   |   |
| Service cost                                              |       | $                        | 2,366      |                        | $          | 2,701 |   | $ | 8,469 |   | $ | 6,563 |   |
| Interest cost                                             |       | 3,603                    |       | 4,505                       |       | 12,894 |   | 10,948 |   |
| Expected return on plan assets                            |       | (3,612                   | )          | (4,326                      | )          | (12,928 | ) | (10,512 | ) |
| Net amortization of losses (gains) on prior service costs |       | 698                      |       | 121                         |       | 2,498 |   | 293 |   |
| Pension Plan expense                                      |       | $                        | 3,055      |                        | $          | 3,001 |   | $ | 10,933 |   | $ | 7,292 |   |

 

The componentsof SERP Plan expense are as follows:

 
| ** **                                         | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in  thousands)**                                | ** ** | **May 1,  2004**         | ** ** | **May 3,  2003**            | ** ** | **May 1,  2004** | ** ** | **May 3,  2003** | ** ** |
|                                               |       |                     |       |                        |       |   |   |   |   |
| Service cost                                       |       | $                        | 342        |                        | $          | 357 |   | $ | 1,024 |   | $ | 755 |   |
| Interest cost                                      |       | 977                      |       | 1,138                       |       | 2,930 |   | 2,409 |   |
| Net amortization of losses and prior service costs |       | 367                      |       | 363                         |       | 1,099 |   | 769 |   |
| SERP Plan expense                                  |       | $                        | 1,686      |                        | $          | 1,858 |   | $ | 5,053 |   | $ | 3,933 |   |

 

The componentsof Postretirement Plan expense are as follows:

 
| ** **                    | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|-------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in thousands)**            | ** ** | **May 1,  2004**         | ** ** | **May 3,  2003**            | ** ** | **May 1,  2004** | ** ** | **May 3,  2003** | ** ** |
|                          |       |                     |       |                        |       |   |   |   |   |
| Service cost                  |       | $                        | 20         |                        | $          | 24 |   | $ | 60 |   | $ | 74 |   |
| Interest cost                 |       | 385                      |       | 430                         |       | 1,156 |   | 1,296 |   |
| Net amortization and deferral |       | 111                      |       | 86                          |       | 331 |   | 258 |   |
| Postretirement Plan expense   |       | $                        | 516        |                        | $          | 540 |   | $ | 1,547 |   | $ | 1,628 |   |

 

9

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At August 1, 2003, the funded status of the Company’s employeebenefit plans was as follows:

 
| **(in  thousands)**           | ** ** | **Pension  Plan** | ** ** | **SERP  Plan** | ** ** | **Postretirement  Plan** | ** ** |
|-------------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|
| ** **                    | ** ** | ** **        | ** ** | ** **     | ** ** | ** **               | ** ** |
| Projected benefit obligations |       | $                 | 244,997    |           | $          | 57,638                   |       | $ | 24,907 |   |
| Fair value of assets          |       | 183,044           |       | —         |       | —                   |       |
| Underfunded status            |       | $                 | 61,953     |           | $          | 57,638                   |       | $ | 24,907 |   |

 

The Company hadcumulative unrecognized expense for the Pension Plan of $76.5 million atAugust 1, 2003 primarily related to the delayed recognition of differencesbetween the Company’s actuarial assumptions and actual results, whichcontributed to the $62.0 million underfunded status of the Pension Plan atAugust 1, 2003.  In addition, theCompany had cumulative unrecognized expense for the SERP Plan andPostretirement Plan aggregating $25.1 million at August 1, 2003.

 

The Company’spolicy is to fund the Pension Plan at or above the minimum required bylaw.  In the third quarter of 2003, theCompany made a required contribution of $11.5 million and a voluntarycontribution of $13.5 million to the Pension Plan for the plan year endedJuly 31, 2002.  In addition, theCompany made contributions of $5.8 million in 2003 for the plan year endedJuly 31, 2003.  In the secondquarter of 2004, the Company made a $30 million voluntary contribution to thePension Plan for the plan year ended July 31, 2003.  Based upon currently available information,the Company will not be required to make any additional contributions to thePension Plan for the plan years ending July 31, 2003 and July 31,2004.

 

8.                                       Commitments and Contingencies

 

The Companyis involved in various suits and claims in the ordinary course ofbusiness.  Management does not believethat the disposition of any such suits or claims will have a material adverseeffect upon the consolidated results of operations, cash flows or the financialposition of the Company.

 

10

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9.                                       Change in Accounting Principle – Writedown ofIntangible Assets

 

As of thebeginning of the first quarter of 2003, the Company adopted the provisions ofStatement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and OtherIntangible Assets.”  SFAS No. 142established a new fair value-based accounting model for the valuation ofgoodwill and indefinite-lived intangible assets recorded in connection withbusiness combinations.  Pursuant to theprovisions of SFAS No. 142, goodwill and indefinite-lived intangible assets aremeasured for impairment by applying a fair value-based test at least annuallyand are not amortized.

 

Inconnection with the adoption of the provisions of SFAS No. 142, the Companyengaged third-party appraisal experts to assist with the determination of thefair value of its goodwill and intangible assets.  For each of the Company’s operating segments,a summary of the intangible assets recorded by the Company as of the beginningof the first quarter of 2003 in accordance with the cost-based accounting modelestablished by previous accounting principles and the adjustment required toadopt the fair value model of SFAS No. 142 is as follows:

 
| **(in  thousands)**         | ** ** | **Carrying  Value at  August 4, 2002** | ** ** | **SFAS  No. 142  Adjustment** | ** ** | **Adjusted  Carrying  Value** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| **Direct Marketing**        |       |                                        |       |                          |       |                          |       |
| Goodwill                    |       | $                                           | 23,747     |                          | $          | —                        |       | $ | 23,747 |   |
| Indefinite-lived tradenames |       | 60,732                                      |       | (24,066                       | )          | 36,666                        |       |
|                        |       |                                        |       |                          |       |                          |       |
| **Other**                   |       |                                        |       |                          |       |                          |       |
| Indefinite-lived tradenames |       | 32,945                                      |       | —                        |       | 32,945                        |       |
|                        |       | $                                           | 117,424    |                          | $          | (24,066                       | )          | $ | 93,358 |   |

 

The $24.1million writedown in the carrying value of the indefinite-lived assets of theCompany’s Direct Marketing segment is reflected as a change in accountingprinciple ($14.8 million, net of taxes) in the accompanying condensedconsolidated statements of earnings for the first quarter of 2003.

 

10.                                 Income Taxes

 

TheCompany’s effective income tax rate was 36.5 percent for 2004 and 38.5 percentfor 2003.  In the second quarter of 2004,the Company recognized a net income tax benefit of $7.5 million related tofavorable settlements associated with previous state tax filings.  Excluding this benefit, the effective taxrate was 39.0 percent for 2004 and 38.5 percent for 2003.  This increase in the effective tax rate isprimarily due to higher state income taxes.

 

11

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**ITEM 2****.****        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**FACTORS THAT MAY AFFECT FUTURERESULTS**

Matters discussed inManagement’s Discussion and Analysis of Financial Condition and Results ofOperations include forward-looking statements, including statements regardingthe Company’s objectives and expectations concerning, among other things, its:

 

•                  productivity and profitability;

 

•                  merchandising and marketing strategies;

 

•                  inventory performance;

 

•                  store renovation and expansion plans;

 

•                  capitalexpenditures;

 

•                  liquidity; and

 

•                  development of management information systems.

 

These forward-lookingstatements are made based on management’s expectations and beliefs concerningfuture events, as well as on assumptions made by and data currently availableto management.  These forward-lookingstatements involve a number of risks and uncertainties and are not guaranteesof future performance.  A variety offactors could cause the Company’s actual results to differ materially from theanticipated or expected results expressed in these forward-lookingstatements.  Factors that could affectfuture performance include, but are not limited, to:

 

•                  currentpolitical and economic conditions;

 

•                  changesin political and economic conditions that may occur in the future;

 

•                  terrorist activities in the United States, as well as the potential escalationin the international war on terrorism;

 

•                  political, social, economic or other events resulting in the short or long-termdisruption in business at the Company’s stores, distribution centers oroffices;

 

•                  changesin consumer confidence resulting in a reduction of discretionary spending ongoods that are, or are perceived to be, “luxuries”;

 

•                  changesin demographic or retail environments;

 

•                  changesin consumer preferences or fashion trends;

 

•                  competitive responses to the Company’s marketing, merchandising and promotionalefforts and/or inventory liquidations by vendors or other retailers;

 

•                  changesin the Company’s relationships with its key customers;

 

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

 

•                  seasonality of the retail business;

 

•                  adverseweather conditions, particularly during peak selling seasons;

 

•                  delaysin anticipated store openings;

 

•                  naturaldisasters;

 

•                  significant increases in paper, printing and postage costs;

 

•                  litigation that may have an adverse effect on the financial results or reputationof the Company;

 

•                  changesin the Company’s relationships with designers, vendors and other sources ofmerchandise;

 

•                  thefinancial viability of the Company’s designers, vendors and other sources ofmerchandise;

 

•                  thedesign and implementation of new information systems as well as enhancement ofexisting systems;

 

12

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•                  changesin foreign currency exchange rates;

 

•                  impactof funding requirements related to the Company’s noncontributory definedbenefit pension plan;

 

•                  changesin the Company’s relationships with certain of its key sales associates;

 

•                  changesin key management personnel;

 

•                  changesin the Company’s proprietary credit card arrangement that adversely impact itsability to provide consumer credit; or

 

•                  changesin government or regulatory requirements increasing the Company’s costs ofoperations.

 

The Company undertakes noobligation to update or revise (publicly or otherwise) any forward-lookingstatements to reflect subsequent events, new information or futurecircumstances.

 

CRITICALACCOUNTING POLICIES

 

The preparation of condensedfinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions about futureevents.  These estimates and assumptionsaffect amounts of assets, liabilities, revenues and expenses and the disclosureof gain and loss contingencies at the date of the condensed consolidatedfinancial statements.  The amountscurrently estimated by the Company are subject to change if differentassumptions as to the outcome of future events were made.  The Company evaluates its estimates andjudgments on an ongoing basis and predicates those estimates and judgments onhistorical experience and on various other factors that are believed to bereasonable under the circumstances. Management makes adjustments to its assumptions and judgments when factsand circumstances dictate.  Since futureevents and their effects cannot be determined with absolute certainty, actualresults may differ from the estimates used by the Company in preparing theaccompanying condensed consolidated financial statements.

 

See Note 1 of the Notes toCondensed Consolidated Financial Statements in Item 1 for a summary of theCompany’s critical accounting policies. A description of the Company’s critical accounting policies is includedin the Company’s Annual Report to Shareholders on Form 10-K for the fiscal yearended August 2, 2003.

 

OVERVIEW

 

The Neiman Marcus Group, Inc.,together with its operating divisions and subsidiaries, is a high-end specialtyretailer.  The Company’s operationsinclude the Specialty Retail Stores segment and the Direct Marketing segment.  The Specialty Retail Stores segment consistsprimarily of Neiman Marcus and Bergdorf Goodman stores.  The Direct Marketing segment conducts bothprint catalog and online operations under the Neiman Marcus, Horchow and Chef’sCatalog brand names.

 

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

 
| ** **                                                                          | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                          | ** ** | **May 1,  2004**         | ** ** | **May 3,  2003**            | ** ** | **May 1,  2004** | ** ** | **May 3,  2003** | ** ** |
| Revenues                                                                            |       | 100.0                    | %          | 100.0                       | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold including buying and occupancy costs                             |       | 61.9                     |       | 64.1                        |       | 64.2 |   | 65.6 |   |
| Selling, general and administrative expenses                                        |       | 24.5                     |       | 25.9                        |       | 24.7 |   | 25.8 |   |
| Operating earnings                                                                  |       | 13.6                     |       | 9.9                         |       | 11.1 |   | 8.6 |   |
| Interest expense, net                                                               |       | 0.5                      |       | 0.6                         |       | 0.4 |   | 0.5 |   |
| Earnings before income taxes, minority interest and change in  accounting principle |       | 13.1                     |       | 9.3                         |       | 10.7 |   | 8.1 |   |
| Income taxes                                                                        |       | 5.1                      |       | 3.6                         |       | 3.9 |   | 3.1 |   |
| Earnings before minority interest and change in accounting principle                |       | 8.0                      |       | 5.7                         |       | 6.8 |   | 5.0 |   |
| Minority interest in net earnings of subsidiaries                                   |       | (0.1                     | )          | (0.1                        | )          | (0.1 | ) | (0.1 | ) |
| Earnings before change in accounting principle                                      |       | 7.8                      |       | 5.7                         |       | 6.7 |   | 4.9 |   |
| Change in accounting principle – writedown of intangible assets, net of  taxes |       | —                   |       | —                      |       | — |   | (0.6 | ) |
| Net earnings                                                                        |       | 7.8                      | %          | 5.7                         | %          | 6.7 | % | 4.3 | % |

 

13

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**OPERATING RESULTS**

 

Set forth in the following tableis certain summary information with respect to the Company’s operations for theperiods indicated.

 
| ** **                                 | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(dollars in  millions)**                 | ** ** | **May 1,  2004**         | ** ** | **May 3,  2003**            | ** ** | **May 1,  2004** | ** ** | **May 3,  2003** | ** ** |
|                                       |       |                     |       |                        |       |   |   |   |   |
| REVENUES                                   |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail Stores                    |       | $                        | 722.0      |                        | $          | 591.2 |   | $ | 2,230.1 |   | $ | 1,948.5 |   |
| Direct Marketing                           |       | 126.2                    |       | 112.8                       |       | 445.7 |   | 388.4 |   |
| Other (1)                                  |       | 29.4                     |       | 18.9                        |       | 80.8 |   | 58.6 |   |
| Total                                      |       | $                        | 877.6      |                        | $          | 722.9 |   | $ | 2,756.6 |   | $ | 2,395.5 |   |
|                                       |       |                     |       |                        |       |   |   |   |   |
| OPERATING EARNINGS                         |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail Stores                    |       | $                        | 115.2      |                        | $          | 68.3 |   | $ | 279.1 |   | $ | 186.0 |   |
| Direct Marketing                           |       | 9.8                      |       | 10.4                        |       | 45.2 |   | 35.8 |   |
| Other (1)                                  |       | (5.4                     | )          | (6.9                        | )          | (17.4 | ) | (16.3 | ) |
| Total                                      |       | $                        | 119.6      |                        | $          | 71.8 |   | $ | 306.9 |   | $ | 205.5 |   |
|                                       |       |                     |       |                        |       |   |   |   |   |
| OPERATING PROFIT MARGIN                    |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail Stores                    |       | 16.0                     | %          | 11.6                        | %          | 12.5 | % | 9.5 | % |
| Direct Marketing                           |       | 7.8                      | %          | 9.2                         | %          | 10.1 | % | 9.2 | % |
| Total                                      |       | 13.6                     | %          | 9.9                         | %          | 11.1 | % | 8.6 | % |
|                                       |       |                     |       |                        |       |   |   |   |   |
| COMPARABLE REVENUES (2)                    |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail Stores (3)                |       | 22.1                     | %          | (0.3                        | )%         | 13.7 | % | 0.4 | % |
| Direct Marketing                           |       | 11.9                     | %          | 10.8                        | %          | 14.8 | % | 11.6 | % |
| Total                                      |       | 21.4                     | %          | 1.5                         | %          | 14.4 | % | 2.3 | % |
|                                       |       |                     |       |                        |       |   |   |   |   |
| STORE COUNT (3)                            |       |                     |       |                        |       |   |   |   |   |
| Neiman Marcus and Bergdorf Goodman stores: |       |                     |       |                        |       |   |   |   |   |
| Open at beginning of period                |       | 37                       |       | 37                          |       | 37 |   | 35 |   |
| Opened during the period                   |       | —                   |       | —                      |       | — |   | 2 |   |
| Open at end of period                      |       | 37                       |       | 37                          |       | 37 |   | 37 |   |
| Clearance centers:                         |       |                     |       |                        |       |   |   |   |   |
| Open at beginning of period                |       | 14                       |       | 13                          |       | 14 |   | 12 |   |
| Opened during the period                   |       | —                   |       | —                      |       | — |   | 1 |   |
| Open at end of period                      |       | 14                       |       | 13                          |       | 14 |   | 13 |   |

 

----

(1)          Other includes the operationsof the Brand Development Companies and corporate expenses.

 

(2)          Comparable revenues include 1)revenues derived from the Company’s retail stores open for more than 52 weeks,including stores that have been relocated or expanded, 2) revenues from theCompany’s Direct Marketing operations and 3) revenues from the Company’s BrandDevelopment Companies.

 

(3)          The Company’s Neiman MarcusGalleries stores have been excluded. The Company previously opened three Galleries stores in the secondquarter of fiscal year 1999 and in the first quarter of fiscal year 2000.  One of these stores was closed in the thirdquarter of fiscal 2002 and the remaining two stores were closed in the second quarterof 2004.

 

14

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**THIRTEEN WEEKS ENDED MAY 1,2004 COMPARED TO THIRTEEN WEEKS ENDEDMay 3, 2003**

 

*Revenues.** *Revenues for the thirdquarter of 2004 of $877.6 million increased $154.7 million, or 21.4 percent,from $722.9 million in the prior year period.

 

Comparable revenues in the thirdquarter of 2004 increased 21.4 percent compared to the prior year period.  Comparable revenues increased 22.1 percentfor Specialty Retail Stores and 11.9 percent for Direct Marketing.  The Company believes the increases in itscomparable revenues were the result of a higher level of consumer spending, ingeneral, with a higher increase coming from the affluent luxury customer servedby the Company.  In addition, the Companybelieves the increases in its comparable revenues were also driven by varioussales events conducted by its Specialty Retail Stores during the third quarterof 2004 and by the growth of internet sales for Direct Marketing.  Comparable revenues in thethird quarter of 2003 increased by 1.5 percent.

 

Comparable revenues for the BrandDevelopment Companies increased in the third quarter of 2004 with increases forboth Kate Spade LLC and Gurwitch Products, LLC.

 

*Gross margin.*  Gross margin was 38.1 percent of revenues forthe third quarter of 2004 compared to 35.9 percent for the third quarter of2003.  The increase in gross margin wasprimarily due to higher product margins and a decrease in buying and occupancycosts as a percentage of revenues.

 

The higher margins realized bythe Company in the third quarter of 2004 were primarily due to a lower level ofmarkdowns required to be taken by the Specialty Retail Stores during the thirdquarter of 2004.  The Company believesthe lower level of markdowns was due to 1) an improvement in economicconditions that resulted in higher sales and 2) the Company’s continuedemphasis on both inventory management and full-price selling.  Consistent with industry business practice,the Company receives allowances from certain of its vendors in support of themerchandise purchased by the Company for resale.  The Company receives the majority of theallowances at the end of its second and fourth quarters.  The amounts of vendor reimbursements receivedby the Company did not have a significant impact on the year-over-year changein gross margin in the third quarter of 2004.

 

A significant portion of theCompany’s buying and occupancy costs are fixed in nature.  Buying and occupancy costs decreased as apercentage of revenues during the third quarter of 2004 compared to the thirdquarter of 2003 primarily due to the Company’s improved leveraging of fixedexpenses, including payroll expense and rent and related occupancyexpenses.  The decrease in buying andoccupancy costs was offset, in part, by an increase in depreciation expense dueto higher levels of capital spending in recent years.

 

*Selling, general and administrative expenses*.  Selling, general and administrative expenses(SG&A) were 24.5 percent of revenues in the third quarter of 2004 comparedto 25.9 percent of revenues in the third quarter of 2003.

 

The net decrease in SG&A as apercentage of revenues in the third quarter of 2004 was primarily due toproductivity improvements in various expense categories, including payroll,employee benefits and advertising costs for the Specialty Retail Stores as aresult of the higher level of sales during the quarter.  Employee benefit expenses for the thirdquarter of 2004 were relatively unchanged on a dollar basis from the prioryear.

 

The decreases in SG&A werepartially offset by higher costs for incentive compensation as a result of theincreased operating profits generated by the Company.  In addition, the net income generated by theCompany’s credit card portfolio, as a percentage of revenues, declined comparedto the prior year due to 1) a $2.3 million reduction in income due to therequired amortization of the premium associated with the carrying value of theRetained Interests during the Transition Period, as more fully described inNote 6 of the Notes to Condensed Consolidated Financial Statements, and 2) adecrease in the yield earned on the credit card portfolio attributable to adecrease in the average days the receivables are outstanding prior to customerpayment offset, in part, by a lower level of bad debts.

 

*Segment operating earnings*.  Operating earnings for the Specialty RetailStores segment were $115.2 million in the third quarter of 2004 compared to$68.3 million in the third quarter of 2003. This increase was primarily the result of increased sales, reducedmarkdowns and net decreases in buying and occupancy costs and SG&A expensesas percentages of revenues.

 

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Operating earnings for DirectMarketing decreased to $9.8 million in the third quarter of 2004 from $10.4million in the third quarter of 2003, primarily as a result of increasedmarkdowns and a net increase in SG&A expenses as a percentage ofrevenues.  The increase in SG&Aexpenses as a percentage of revenues is primarily related to an increase incatalog production and circulation costs and web marketing costs during thethird quarter of 2004.

* *

*Interest expense, net*.  Net interest expense was $4.6 million for thethird quarter of 2004 compared to $4.2 million for the third quarter of2003.  The increase in net interestexpense for the third quarter of 2004 is primarily due to the interest paid onthe borrowings under the Credit Card Facility offset, in part, by an increasein capitalized interest charges associated with store construction andremodeling activities.

 

*Income taxes.*  The Company’s effective income tax rate was39.0 percent for the third quarter of 2004 and 38.5 percent for the thirdquarter of 2003.

 

**THIRTY-NINE WEEKS ENDED MAY 1,2004 COMPARED TO THIRTY-NINE WEEKS ENDED MAY 3, 2003**

 

*Revenues.** *Revenues for 2004 of $2.76billion increased $361.1 million, or 15.1 percent, from $2.40 billion in theprior year period.

 

Comparable revenues in 2004increased 14.4 percent compared to the prior year period.  Comparable revenues increased 13.7 percentfor Specialty Retail Stores and 14.8 percent for Direct Marketing.  The Company believes the increases in itscomparable revenues were the result of a higher level of consumer spending, ingeneral, with a higher increase coming from the affluent luxury customer servedby the Company.  In addition, the Companybelieves the increases in its comparable revenues were also driven by salesevents conducted by its Specialty Retail Stores and by the growth of internet salesfor Direct Marketing.  Comparablerevenues in 2003 increased by 2.3 percent.

 

Comparable revenues for the BrandDevelopment Companies increased in 2004 with increases for bothKate Spade LLC and Gurwitch Products, LLC.

 

*Gross margin.*  Gross margin was 35.8 percent of revenues for2004 compared to 34.4 percent for 2003. The increase in gross margin was primarily due to higher product marginsand a decrease in buying and occupancy costs as a percentage of revenues.

 

The higher product marginsrealized by the Company were a function of a lower level of markdowns requiredto be taken by the Specialty Retail Stores during 2004.  The Company believes the lower level ofmarkdowns was due to 1) an improvement in economic conditions that resulted inhigher sales, 2) the Company’s continued emphasis on both inventory managementand full-price selling and 3) the discontinuance of various promotional salesactivities conducted by the Company in the prior year, primarily in the secondquarter of 2003.  Consistent withindustry business practice, the Company receives allowances from certain of itsvendors in support of the merchandise purchased by the Company for resale.  The Company receives the majority of theallowances at the end of its second and fourth quarters.  The amounts of vendor reimbursements receivedby the Company did not have a significant impact on the year-over-year changein gross margin in 2004.

 

A significant portion of theCompany’s buying and occupancy costs are fixed in nature.  Buying and occupancy decreased as apercentage of revenues during 2004 compared to 2003 primarily due to theCompany’s improved leveraging of fixed expenses, including payroll expense andrent and related occupancy expenses.  Thedecrease in buying and occupancy costs was offset, in part, by an increase indepreciation expense due to higher levels of capital spending in recent years.

 

*Selling, general and administrative expenses*.  Selling, general and administrative expenses(SG&A) were 24.7 percent of revenues in 2004 compared to 25.8 percent ofrevenues in 2003.

 

The net decrease in SG&A as apercentage of revenues in 2004 was primarily due to 1) productivityimprovements in various expense categories, including payroll, employeebenefits and advertising as a result of the higher level of sales during theperiod, 2) reduced preopening costs and 3) the $3.7 million favorable impactrecorded in the second quarter of 2004 as a result of conclusions on certainsales tax and unclaimed property examinations for which the agreed-onsettlements were less than the amounts previously estimated by theCompany.  In 2003, the Company incurredpreopening expenses of $7.6 million in connection with the opening of twoNeiman Marcus stores in Florida in the first quarter of 2003, the opening of anew clearance center store in the second quarter of 2003 and the grand openingof the remodeled and expanded Neiman Marcus store in Las Vegas in the secondquarter of 2003.

 

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The decreases in SG&A werepartially offset by higher costs for incentive compensation as a result of theincreased operating profits generated by the Company.  In addition, the net income generated by theCompany’s credit card portfolio, as a percentage of revenues, declined comparedto the prior year due to 1) a $7.6 million reduction in income due to therequired amortization of the premium associated with the carrying value of theRetained Interests during the Transition Period, as more fully described inNote 6 of the Notes to Condensed Consolidated Financial Statements, and 2) adecrease in the yield earned on the credit card portfolio attributable to adecrease in the average days the receivables are outstanding prior to customerpayment offset, in part, by a lower level of bad debts.

 

*Segment operating earnings*.  Operating earnings for the Specialty RetailStores segment were $279.1 million in 2004 compared to $186.0 million in2003.  This increase was primarily theresult of increased sales, reduced markdowns and net decreases in both buyingand occupancy expenses and SG&A expenses as percentages of revenues.

 

Operating earnings for DirectMarketing increased to $45.2 million in 2004 from $35.8 million in 2003,primarily as a result of increased sales and net decreases in both buying andoccupancy costs and SG&A expenses as a percentage of revenues offset, inpart, by higher markdowns.

 

*Interest expense, net*.  Net interest expense was $11.8 million for2004 compared to $12.2 million for 2003. The decrease in net interest expense is primarily due to an increase incapitalized interest charges associated with store construction and remodelingactivities and lower interest related to its revolving credit facility, offsetby interest paid on the borrowings under the Credit Card Facility.  As a result of a higher level of cashgenerated by operations, the Company incurred no borrowings on its revolvingcredit facility to fund seasonal working capital requirements in the secondquarter of 2004.  Seasonal borrowingsunder the Company’s revolving credit facility reached $80 million in the secondquarter of 2003 and were repaid prior to the end of the quarter.

 

*Income taxes.*  The Company’s effective income tax rate was36.5 percent for 2004 and 38.5 percent for 2003.  In the second quarter of 2004, the Companyrecognized a net income tax benefit of $7.5 million related to favorablesettlements associated with previous state tax filings.  Excluding this benefit, the effective taxrate was 39.0 percent for 2004 and 38.5 percent for 2003.  This increase in the effective tax rate isprimarily due to higher state income taxes.

 

**SEASONALITY**

 

The Company’s business, like thatof most retailers, is subject to seasonal influences, with a higher level ofrevenues and net earnings realized during the fall season, which includes thesecond quarter holiday selling season. In light of these patterns, SG&A expenses are typically higher as apercentage of net revenues during the first, third and fourth quarters of eachyear, and working capital needs are greater in the first and second quarters ofeach year.  The increases in workingcapital needs during the first and second quarter have typically been financedwith cash flows from operations, borrowings under the Company’s revolvingcredit facility and cash provided from the Company’s Credit Card Facility.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s cash requirementsconsist principally of 1) the funding of its merchandise purchases, 2) capitalexpenditures for new store growth, store renovations and upgrades of itsmanagement information systems, 3) debt service requirements and 4) obligationsrelated to its defined benefit pension plan. The Company’s working capital requirements fluctuate during the year, increasingsubstantially during the fall season as a result of higher planned seasonalinventory levels.

 

The Company generated cash fromoperations (net earnings as adjusted for non-cash charges) of $281.0 million in2004 compared to $191.0 million in 2003. This $90.0 million increase in cash generated was due to the highersales and earnings levels realized in 2004. In presenting the net cash flows used for operating activities for 2004of $291.3 million, the cash impact of the increase in earnings was affected by1) the voluntary cash contribution of $30 million made to the Company’s definedbenefit pension plan in the second quarter of 2004 and 2) the increase inrecorded accounts receivable from $22.6 million at August 2, 2003 to$599.6 million at May 1, 2004.  Theincrease in accounts receivable is attributable to both a higher investment inaccounts receivable due to higher sales levels during 2004 and thediscontinuance of Off-Balance Sheet Accounting beginning in December 2003,as more fully described in Note 6 of the Notes to Condensed ConsolidatedFinancial Statements.

 

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The discontinuance of Off-BalanceSheet Accounting for the newly generated accounts receivable had the impact ofincreasing accounts receivable by $577.0 million for the amount of transfers tothe Trust no longer qualifying for Off-Balance Sheet Accounting.  The Company’s total credit card and otheraccounts receivable portfolio increased from $490.7 million at August 2,2003 to $599.6 million at May 1, 2004. This $108.9 million increase is shown in the 2004 condensed consolidatedstatement of cash flows as follows:

 
| Operating activities:                                                      |   |   |   |
|----------------------------------------------------------------------------|--------|--------|--------|
| Increase in accounts receivable                                            |   | $      | (577.0 | ) |
| Investing activities:                                                      |   |   |   |
| Purchases of held-to-maturity securities (Retained Interests)              |   | (240.8 | )      |
| Maturities of hold-to-maturity securities (Retained Interests)             |   | 483.4  |   |
| Financing activities:                                                      |   |   |   |
| Borrowings under Credit Card Facility                                      |   | 225.0  |   |
| Change in other comprehensive income                                       |   | 0.5    |   |
| Net increase in total credit card and other accounts receivable  portfolio |   | $      | (108.9 | ) |

 

As of May 1, 2004, the Companyhad cash and cash equivalents of $312.0 million and no outstanding borrowingsunder the Company’s $300 million unsecured revolving credit facility.  At May 3, 2003, the Company had cash and cashequivalents of $133.7 million and no outstanding borrowings under the $300million unsecured revolving credit facility. The amount of cash on hand and borrowings under the revolving creditfacility are influenced by a number of factors, including sales, accountsreceivable, inventory levels, vendor terms, the level of capital expenditures,cash requirements related to financing instruments, pension plan fundingobligations and the Company’s tax obligations, among others.

 

In the second quarter of 2004,the Company made a $30 million voluntary contribution to the Pension Plan forthe plan year ended July 31, 2003. Based upon currently available information, the Company will not berequired to make any additional contributions to the Pension Plan for the planyears ending July 31, 2003 and July 31, 2004.

 

The Company currently projectscapital expenditures for 2004 to be approximately $110 million to $120 million,primarily for store renovations and upgrades to information systems.

 

**FINANCING STRUCTURE**

 

In the second quarter of 2004,the Company’s Board of Directors initiated a quarterly cash dividend of $0.13per share.  The Company declareddividends on January 30, 2004 and on April 30, 2004.  As of May 1, 2004, the Company had dividendspayable in the amount of $6.3 million included in accrued liabilities in theaccompanying condensed consolidated balance sheet, which were paid in May 2004.

 

In prior years, the Company’sBoard of Directors authorized various stock repurchase programs and increasesin the number of shares subject to repurchase. During the first quarter of 2004, the Company repurchased 175,600 sharesat an average purchase price of $40.01. As of May 1, 2004, approximately 1.2 million shares remained authorizedfor repurchase under the Company’s stock repurchase programs.

 

The Company’s principalcommercial obligations are comprised of senior notes, senior debentures,borrowings under the Credit Card Facility, capital lease obligations, operatinglease obligations, construction commitments, pension plan funding obligations,short-term merchandise purchase commitments, common area maintenance costs, taxand insurance obligations and contingent rent payments.

 

Management believes thatoperating cash flows, currently available vendor financing and amountsavailable pursuant to its revolving credit facility and its Credit CardFacility should be sufficient to fund the Company’s operations, debt service,Pension Plan funding requirements, contractual obligations and currentlyanticipated capital expenditure requirements through the end of fiscal year2004.

 

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**OFF-BALANCE SHEET ARRANGEMENTS**

 

Pursuant to a revolving creditcard securitization program (the Credit Card Facility),the Company transfers substantially all of its credit card receivables to awholly-owned subsidiary, Neiman Marcus Funding Corporation, which in turn sellssuch receivables 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) and to the Company in an aggregateamount equal to the excess of the balance of the credit card portfolio over$225 million (Retained Interests).  Inorder to maintain the committed level of securitized assets, cash collectionson the securitized receivables are used by the Trust to purchase new creditcard balances from the Company in accordance with the terms of the Credit CardFacility.

 

From its inception untilDecember 2003, the Company’s transfers and sales of credit cardreceivables pursuant to the terms of the Credit Card Facility were accountedfor as sales in accordance with generally accepted accounting principles(Off-Balance Sheet Accounting).  As aresult, $225 million of credit card receivables were removed from the Company’sbalance sheet at the inception of the Credit Card Facility and the Company’s$225 million repayment obligation to the holders of the certificatesrepresenting the Sold Interests was not required to be shown as a liability onthe Company’s balance sheet.  During theperiod the transfers and sales qualified for Off-Balance Sheet Accounting, theRetained Interests were shown as “Undivided interests in NMG Credit Card MasterTrust” on the Company’s condensed consolidated balance sheets.

 

Beginning in April 2005,cash collections will be used by the Trust to repay the $225 million principalbalance of the Class A Certificates in six monthlyinstallments of $37.5 million (Amortization Period).  As a result of certain provisions in thesecuritization agreement, the Company holds certain rights to repurchase theClass A Certificates (Repurchase Option) subsequent tothe commencement of the Amortization Period and, therefore, has the ability toregain effective control over the credit card receivables held by the Trust atthe time the Repurchase Option becomes exercisable.  The Company believes that the RepurchaseOption will become exercisable in September 2005.

 

Transfers to the Trust ceased toqualify for Off-Balance Sheet Accounting beginning in December 2003 sincethe contractual life of the receivables transferred after November 2003 isestimated to extend to September 2005 when the Repurchase Option becomesexercisable.  Rather, these transfers arerecorded as secured borrowings by the Company (Financing Accounting).  As a consequence, the credit card receivablesgenerated after November 2003 remained on the Company’s balance sheet andthe Company recorded a liability for its repayment obligation to the holders ofthe $225 million of certificates representing the Sold Interests.  The transition period from Off-Balance SheetAccounting to Financing Accounting (Transition Period) lasted approximatelyfour months (December 2003 to March 2004).  During the Transition Period, cashcollections of receivables were allocated to the previous Sold Interests andRetained Interests until such time as those balances were reduced to zero.

 

As of May 1, 2004, the Company’sentire credit card portfolio is included in accounts receivable in itscondensed consolidated balance sheet and the $225 million repayment obligationis shown as a liability.

 

**OUTLOOK**

 

Based on current estimates, theCompany anticipates comparable store revenues to increase in the 8 to 10percent range for its fourth quarter ending July 31, 2004.  The accuracy of these assumptions and of theresulting forecasts is subject to uncertainties and circumstances beyond theCompany’s control.  Consequently, actualresults could differ materially from the forecasted results.  See “Factors That May Affect Future Results”for a discussion of items and events that could cause actual results to varyfrom the Company’s expectations.

 

**RECENT DEVELOPMENTS**

 

On May 26, 2004, the Companyannounced that it has decided to explore its strategic alternatives relating toits Chef’s Catalog Direct Marketing brand. These alternatives may include a sale, merger, joint venture or otherbusiness combination. Chef’s Catalog is a multi-channel retailer ofprofessional-quality kitchenware with approximately $75 million in annualrevenues.

 

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INFLATION AND DEFLATION

 

The Company believes changesin revenues and net earnings that have resulted from inflation or deflationhave not been material during the periods presented.  In recent years, the Company has experiencedcertain inflationary conditions related to 1) increases in product costs dueprimarily to changes in foreign currency exchange rates that have reduced thepurchasing power of the U.S. dollar and 2) increases in SG&A.  The Company attempts to offset the effects ofinflation through control of expenses and price increases, although theCompany’s ability to increase prices may be limited by competitivefactors.  The Company attempts to offsetthe effects of merchandise deflation, which has occurred on a limited basis inrecent years, through control of expenses. There is no assurance, however, that inflation or deflation will notmaterially affect the Company in the future.

 

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**ITEM 3****.****                        QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The market risk inherent in theCompany’s financial instruments represents the potential loss arising fromadverse changes in interest rates and foreign currency exchange rates.  The Company does not enter into derivativefinancial instruments for trading purposes. The Company seeks to manage exposure to adverse interest rate changesthrough its normal operating and financing activities.  The Company is exposed to interest rate riskthrough its securitization and borrowing activities, which are described inNotes 2 and 5 to the Consolidated Financial Statements in the Company’s AnnualReport on Form 10-K for the fiscal year ended August 2, 2003.

 

As of May 1, 2004, the Companyhad no borrowings outstanding under its revolving credit agreement.  Future borrowings under the Company’srevolving credit facility, to the extent of outstanding borrowings, would beaffected by interest rate changes.

 

The Company’s outstandinglong-term debt as of May 1, 2004 is at fixed interest rates and would not beaffected by interest rate changes.  Basedupon quoted prices, the fair value of the Company’s senior notes and debentureswas $270.5 million as of May 1, 2004.

 

Pursuant to its outstandingCredit Card Facility that begins to expire in September 2005, the Companysold substantially all of its credit card receivables through a subsidiary inexchange for certificates representing undivided interests in suchreceivables.  The Class A Certificates, which have an aggregate principal value of$225 million, were sold to third-party investors. The holders of the Class A Certificates are entitled to monthly interestdistributions from the Trust at the contractually-defined rate of one monthLIBOR plus 0.27 percent annually.  Thedistributions to the Class A Certificate holders arepayable from the finance charge income generated by the credit card receivablesheld by the Trust.  At May 1, 2004, theCompany estimates a 100 basis point increase in LIBOR would result in anapproximate annual decrease of $2.25 million in pretax income to the Companyfrom its credit card portfolio.

 

The Company uses derivative financial instruments to manageforeign currency risk related to the procurement of merchandise inventoriesfrom foreign sources.  The Company entersinto foreign currency contracts denominated in the euro and British pound. TheCompany had foreign currency contracts in the form of forward exchangecontracts in the amount of approximately $34.1 million as of May 1, 2004.  The market risk inherent in these instrumentswas not material to the Company’s consolidated financial condition, results ofoperations, or cash flows during the third quarter of 2004.

 

The effects of changes in theU.S. equity and bond markets serve to increase or decrease the value of pensionplan assets, resulting in increased or decreased cash funding by theCompany.  The Company seeks to manageexposure to adverse equity and bond returns by maintaining diversifiedinvestment portfolios and utilizing professional investment managers.

 

Based on areview of the Company’s financial instruments outstanding at May 1, 2004 thatare sensitive to market risks, the Company has determined that there was nomaterial market risk exposure to the Company’s consolidated financial position,results of operations, or cash flows as of such date.

 

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

 

In accordance with Rules 13a-15and 15d-15 of the Securities Exchange Act of 1934, as amended (Exchange Act),the Company carried out an evaluation, under the supervision and with theparticipation of the Chief Executive Officer and Chief Financial Officer, aswell as other key members of the Company’s management, of the effectiveness ofits disclosure controls and procedures as of the end of the period covered bythis report. Based on that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures were effective, as of the end of the period covered by this report,to provide reasonable assurance that information required to be disclosed inits 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 ordinarycourse of business, the Company routinely enhances its information systems byeither upgrading its current systems or implementing new systems.  No change occurred in the Company’s internalcontrols concerning financial reporting during the quarter ended May 1, 2004 thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal controls over financial reporting.

 

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**THE NEIMAN MARCUS GROUP,INC.**

 

PART II

 

Item 1.             LegalProceedings

 

Note 8 of the Notes to CondensedConsolidated Financial Statements in Part I, Item 1 isincorporated herein by reference as if fully restated herein.  Note 8 containsforward-looking statements that are subject to the risks and uncertaintiesdiscussed in “Management’s Discussion and Analysis of Financial Condition andResults of Operations – Factors That May Affect Future Results.”

 

Item 4.             Submission of Matters to a Vote ofSecurity Holders

 

No matters were submitted to avote of security holders of the Company during the quarter ended May 1, 2004.

 

Item 6.             Exhibitsand Reports on Form 8-K

 
| (a)    | Exhibits. |
|--------|-----------|
|   |      |   |   |
|   | 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) Filed herewith. |
|--------|---------------------|

 
| (b)    | Reports on Form 8-K                                                                                                                                                                                                                                                           |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                          |
|   | On February 5, 2004, the  Company filed a Current Report on Form 8-K under Item 9 to disclose under  Regulation FD the Company’s press release dated February 5, 2004  announcing revenue results for the four weeks and quarter ended January 31,  2004. |
|   |                                                                                                                                                                                                                                                                          |
|   | On March 3, 2004, the  Company filed a Current Report on Form 8-K under Item 9 to disclose under  Regulation FD the Company’s press release dated March 3, 2004 announcing  revenue results for the four weeks ended February 28, 2004.                   |
|   |                                                                                                                                                                                                                                                                          |
|   | On March 3, 2004, the  Company filed a Current Report on Form 8-K under Item 12 to disclose under  Regulation FD the Company’s press release dated March 3, 2004 announcing  financial results for the second fiscal quarter ended January 31, 2004.      |
|   |                                                                                                                                                                                                                                                                          |
|   | On April 8, 2004, the  Company filed a Current Report on Form 8-K under Item 9 to disclose under  Regulation FD the Company’s press release dated April 8, 2004 announcing  revenue results for the five weeks ended April 3, 2004.                       |
|   |                                                                                                                                                                                                                                                                          |
|   | On April 13, 2004, the Company filed a Current Report on Form 8-K under Item 9 to disclose under Regulation FD the Company’s press release dated April 13, 2004 announcing that the Company’s Board of Directors declared a quarterly cash dividend.      |

 

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SIGNATURES

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, as amended, the registrant has duly causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

THE NEIMAN MARCUS GROUP, INC.

 
| **Signature**         | ** ** | **Title**                       | ** **                     | **Date** |
|-----------------------|------------|---------------------------------|--------------------------------|----------|
|                  |       |                            |                           |     |
| /s/ T. Dale Stapleton |       |                            | Vice  President and Controller |     | June 7,  2004 |
| T. Dale Stapleton     |       | (principal  accounting officer) |                           |     |
|                       |            |                                 |                                |          |  |

 

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