Hudson’s Bay Co is working with investment bankers and consultants to identify deals and new measures to turn around its Lord & Taylor department store chain, once the cornerstone of its retail empire, people familiar with the matter said.
The move shows how the chain’s fortunes have diverged from Hudson’s Bay’s luxury Saks Fifth Avenue banner, which has managed to better weather the rise of online shopping sites including Amazon.com Inc and the resulting decline of brick-and-mortar stores. It comes as the company decided to sell its eponymous Hudson’s Bay department store in downtown Vancouver, Reuters reported exclusively on Monday.
The Canadian retailer has been working with investment bank PJ Solomon Co for advice on potential deals regarding its department store portfolio, and is also working with consulting firm AlixPartners LLP on cutting costs and reforming its business, the sources said.
Much of their focus has been on Lord & Taylor, which accounts for about one-tenth of Hudson’s Bay’s stores, the sources added.
Hudson’s Bay is also open to divesting Lord & Taylor, but considers this outcome unlikely given the scarcity of potential buyers that would pay top dollar for it amid the retail sector’s malaise, according to the sources, who asked not to be identified discussing confidential deliberations. AlixPartners and PJ Solomon declined to comment.
Hudson’s Bay shares climbed as much as 4.6 percent on the news to their highest in almost eight weeks on Tuesday, and were trading up 2.9 percent at $9.47 at 9:54 a.m. ET.
“Lord & Taylor is a storied brand and we will continue to evolve it for the future,” a Hudson’s Bay spokeswoman said in an e-mailed statement, declining to comment on moves the company was considering with investment bankers and consultants. “As we shared on our last earnings call, recent performance at Lord & Taylor has not met expectations. However, we see a lot of opportunity to grow the business.”
Hudson’s Bay Executive Chairman Richard Baker has publicly expressed disappointment with the chain’s performance. His investment firm NRDC Equity Partners acquired Lord & Taylor for US$1.2 billion in 2006, when department stores were still thriving, and used it as a launch pad to build a holding company with several retail chains.
Long focused on upper middle class markets in the U.S. Northeast and Midwest, Lord & Taylor’s 50 department stores are now increasingly struggling to distinguish themselves from competitors such as Macy’s Inc and off-price retailers including TJX Companies Inc.
Unless Hudson’s Bay, which has lost two-thirds of its market value in the last three years, can reposition Lord & Taylor, the chain risks weighing further on the company’s stock performance, industry insiders said.
“What do we offer consumers that’s differentiated?’ If they can’t answer that question, they need to come up with a reason for consumers to care,” said Greg Portell, lead partner in the retail practice of A.T. Kearney, a management consulting firm.
Lord & Taylor’s president Liz Rodbell left Hudson’s Bay at the end of April, leaving the retailer with another challenge to face. The company expects to name a replacement in the coming weeks, a Hudson’s Bay spokeswoman said.
Hudson’s Bay has mulled a range of options for Lord & Taylor. In March, it considered acquiring Bon-Ton Stores Inc, a bankrupt retailer operating 250 department stores in 23 U.S. states, to merge it with Lord & Taylor, the sources said.
Such a deal would have complemented the two chains’ customer base and improved their buying power, the sources added. However, Hudson’s Bay subsequently abandoned its pursuit of Bon-Ton to focus on other opportunities and continue its revamp, according to the sources. A U.S. bankruptcy judge approved Bon-Ton’s wind-down last month.
Hudson’s Bay held talks earlier this year about merging with private equity-owned department store operator Neiman Marcus Group Ltd, a deal it also pursued unsuccessfully last year, the sources said.
The talks once again ended without an agreement, in part because Neiman Marcus’ US$5 billion debt load was too big for Hudson’s Bay, the sources added.
Lord & Taylor’s 10 percent contribution to total retail sales at Hudson’s Bay has declined significantly over previous years as the company has grown through acquisitions, analysts estimate. The Lord & Taylor division, which includes the Hudson’s Bay department stores and Home Outfitters in Canada, reported comparable sales falling 2.6 percent year-on-year in the three months that ended in February.
Comparable sales at Saks Fifth Avenue, whose 41 stores analysts estimate make up a third of sales at the company, rose 2.1 percent over the same period.
Lord & Taylor has announced it plans to launch a dedicated internet store on budget retailer Walmart Inc’s website this month, a move that may help its presence online but could take further sheen off its name, according to the sources.
Hudson’s Bay has also shown willingness to trim some Lord & Taylor locations. The chain’s flagship property in New York City was sold to WeWork Cos last year for US$850 million. As a result, that store will shrink to a quarter of its current size.
The company also said in October it was exploring a sale of its Hudson’s Bay store in downtown Vancouver, together with its joint venture partner RioCan Real Estate Investment Trust. Reuters reported on Monday it had found a buyer for that store for $675 million (US$524.4 million).
Some Hudson’s Bay shareholders want more. The company should sell one of its weak banners, rather than add another to its stable, which include Galeria Kaufhof in Germany and Galeria Inno in Belgium, said Joshua Varghese, portfolio manager at CI Investments Inc, which is Hudson’s Bay’s sixth-largest shareholder.
“Hudson’s Bay should focus on having fewer stores,” Varghese said. “If that means selling certain brands, then so be it. Lord & Taylor does make sense.”
Update: Last year, U.S. private equity firm Rhône Capital invested US$500 million ($632 million) in Hudson’s Bay. The deal was announced alongside WeWork’s proposed buy of the company’s Lord & Taylor store in New York.
(Reporting by Jessica DiNapoli in New York and Nichola Saminather in Toronto; editing by Greg Roumeliotis and Edward Tobin)
(This story has been edited by Kirk Falconer, editor of PE Hub Canada)
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