The Forrest Gump of Retail?

Another Section 363 purchase-turned-Chapter 22: Fortunoff, the upscale jewelery store, has filed for bankruptcy just 10 months after NRDC Equity Partners purchased it out of bankruptcy. (A few weeks ago the same thing happened to Versa Capital, with portfolio company American Restaurant Group.)

Can’t say we didn’t expect it, though. The buyout strategy always seemed like a stretch: NRDC stated it would not close a single Fortunoff store. It also purchased the company for more than $80 million and only put down $10 million in equity. How could that possibly save a retailer that had simply stopped paying its bills and had already exhausted more than one sale-leaseback?

Upon closer examination, you have to wonder if it’s a sign of things to come for NRDC’s portfolio. Earlier this week, the Wall Street Journal ran a perplexing story about Richard Baker, the head of NRDC and son of successful real estate investor Robert Baker. The article describes Baker as “a deep-pocketed newcomer embraced by the A-list fashion crowd.” Dad Baker is quoted saying, “’How much money could we lose?’” to describe his partners’ reaction to his son’s plans for NRDC.

The Journal describes Baker’s tough times investing in high-end real estate companies just before a recession, while quoting the guy saying his business is strongly positioned.

You can’t blame the Journal for including Baker’s self-serving quotes, but, in reading the article closely, it seems the writing is on his wall. Aside from losing NRDC’s $10 million investment in Fortunoff, the firm lost money on its investment in Linens ‘N Things (alongside Apollo Management), which has since liquidated.

Beyond that, he’s had to merge Hudson’s Bay, one of Canada’s largest department stores, with portfolio company Lord & Taylor, “to shore up the struggling chain,” the Journal reported. He axed Lord & Taylor’s CEO, installing new management to “slash costs.” He fired Peter Som, a designer he paid $3 million to bring aboard. I quote an email from a retail investor, who said, “They are moving a lot of puzzle pieces around and it starts to look like Lampert at Sears – try EVERYTHING, all at once!”

So things look messy at NRDC, and that goes for probably any firm that invests in luxury retailers. The firm hasn’t made any investments beyond the ones I’ve mentioned, which means a lot rides on the success or failure of Lord & Taylor.

I remember talking to a smart guy at Leonard Green & Partners, which owns Neiman Marcus, a comparable business to Lord & Taylor. He told me the firm expects the Neiman Marcus to be extremely volatile, even to the point of unprofitability, during economic downturns. The firm is ok with that, so long as the company is capitalized to withstand it. I’m not so sure that’ll be the case with Lord & Taylor: According to the Journal, NRDC only put down $30 million in equity for the $1.2 billion buyout. That’s 2.5%! Most of that was borrowed against Lord & Taylor’s real estate value.

I heard of a recent quote from Richard Baker that might play into the worries of NRDC investors. In what I assume was a joke, he said he is “The Forrest Gump of Retail,” fancying himself as either unbelievably lucky, or, very um, “special.” Going to assume it was the former. The comment referenced, in particular, the scene where our protagonist and Lieutenant Dan are at sea during a hurricane. Every other fishing boat is completely destroyed, but by some miracle, Forrest, Lt. Dan, and their boat survive unscathed and end up with a bounty of shrimp. For the sake of investors, let’s hope NRDC ends up the same way.