The rapid makeover of the retail industry continued unabated last week. Private equity investors Texas Pacific Group and Warburg Pincus LLC agreed to buy Neiman Marcus for $5.1 billion and the Saks has agreed to sell two department store divisions -- McRae's and Proffitt's -- to Belk for $622 million.

Texas Pacific and Warburg are continuing the trend of private equity firms to pour money into retail.

"People have to find creative ways to put it to work," says Dan Hess, CEO of Merchant Forecast, a research firm that provides retail data institutional investors. "They're playing in distressed debt, real estate and venture capital deals. They are probably looking at every ticker down the lot."

Hess also attributes the rise in private equity activity in part to the success of Edward Lampert and his firm, ESL Investments Inc. ESL bought Kmart and is turning profits off selling excess real estate.

Texas Pacific and Warburg Pincus beat out two other major private equity investment joint ventures -- Blackstone Group and Thomas H. Lee Partners and Kohlberg Kravis Roberts & Co. and Bain Capital -- in acquiring Neiman Marcus. Texas Pacific has some experience in retail. Investments by the company have included stakes in Burger King, Ducati, J. Crew and Petco. But Warburg Pincus, despite having invested $18 billion in private equity since 1971, has never ventured into retail.

KKR and Bain are no strangers to retail, having recently teamed up with Vornado Realty Trust on the $6.6 billion acquisition of Toys 'R' Us. It also was a bidder for Sears and will likely emerge in talks as other chains go on the block. In another recent deal, Minnesota-based private equity firm Goldner Hawn bought ShopKo Stores Inc. for $715 million. Yet another shark circling is Cerberus Capital Management, which briefly was mentioned as a possible buyer of JC Penney, and last year gobbled up Mervyn's.

Hess adds that Vornado was the original model for this kind of investment, with its work with now-defunct chains like Two Guys and Alexanders, but says that Lampert has taken it to the next level and caught the eyes of rival investors who are now emulating his moves.

Potential next deals include West Coast department store chain Gottschalks Inc., which last month hired New York investment bank Financo Inc. to help it consider strategic alternatives, including a sale. Also on the block are Saks' northern department store chains.

But are all these deals smart, or are firms investing solely because the money is burning holes in their pockets? Most analysts have approved of the Neiman's deal due to the company's strength. But there is concern because of the sheer amount of money private equity firms have to use. Firms have nearly $100 billion to invest, and not many places to park that money, according to a report by Deutsche Bank analyst Bill Dreher. But if they don't invest, a private equity fund must forgo its 2 percent management fee, and in some cases, returned the money to investors. That's a recipe that could spell trouble, leading to private equity investors forcing deals rather than facing the proposition of giving money back.

The Nieman deal differs from other recent acquisitions in that most up to now have been for troubled retailers. Buyers either are searching for ways to reverse their flagging fortunes or are looking to juice their returns through the companies' real estate assets. But Neiman has been a prime performer in recent years. Along with Nordstrom and Saks Fifth Avenue, Nieman has posted healthy sales gains. The deal values its stock at $100 per share, a bit higher than where the stock was trading prior to the deal's announcement.

Hess says that Nieman's new owners will likely look to expand the company and then take it public again in a few years. Currently, the firm operates 35 Neiman Marcus stores and two Bergdorf Goodmans.

Some observers are skeptical, saying that it is not easy to grow a luxury chain quickly without diluting the brand's cachet. Neiman Marcus also faces stiff competition from Saks Fifth Avenue and Nordstrom.

"Nordstrom is running circles around Neiman Marcus among the super-affluent luxury consumers where Neiman Marcus focuses its marketing efforts," says Pam Danzinger, president of Unity Marketing, which tracks the luxury sector. In the first quarter, Nordstrom attracted 33 percent of the super-affluent consumers while Neiman got 14 percent. "It's going to take more than just expanding their store base to make Neiman Marcus more competitive," she says.

The strong performance of the luxury sector compared to the middle market also was a factor in the proposed Saks deal. Saks Fifth Avenue stores posted a 10.8 percent increase in same-store sales in 2004 while Saks' various middle-market chains were up only 1.6 percent.

Belk, a regional player concentrated in the Southeast, emerged a winner in the Saks deal, boosting its profile through the addition of 47 stores. At the same time, observers are raising more questions about competitor Dillard's. Dillard's has suffered from sagging sales. It could have beefed up its portfolio by acquiring these stores, but instead it let a competitor get stronger.

Saks is still shopping its Northern department store chains, such as Younkers, Herberger's, Carson Pirie Scott, Bergner's, Boston Store. Also on the block is Club Libby Lu. Saks hopes to be left standing with only its Fifth Avenue, Off 5th and Parisian brands.

-- David Bodamer