On Monday, the Hudson’s Bay Co. announced plans to pursue “strategic alternatives” for its Lord & Taylor business, which could include a potential sale, joint venture or merger.
The move is the latest effort by CEO Helena Foulkes — who joined the company in February 2018 — to shed HBC’s underperforming divisions and focus on its more promising banners.
“Over the last year, we’ve taken bold actions and made fundamental fixes that have resulted in a far stronger, more capable HBC, having returned to positive operating cash flow, increased profitability and strengthened the balance sheet,” she said, nodding to the recent announcement that HBC will shutter its Home Outfitters chain in Canada and close up to 20 Saks Off Fifth locations. The company also spun off its European retail business and real estate holdings into a joint venture with Signa Holding, owner of Germany’s Karstadt department store chain, and sold flash sale site Gilt to Rue La La in June 2018.
Given all that — along with the 2017 sale of Lord & Taylor’s flagship Fifth Avenue location to WeWork and the growing success of HBC’s Saks Fifth Avenue business — this week’s news seemed to some like an inevitability.
“In my opinion, the potential sale or monetization of Lord & Taylor is not surprising and is the right move if the deal is right,” Bruce Winder, a partner at the Retail Advisors Network, told FN. “HBC took on too many companies and banners over the last 10 years and have spread themselves too thin, leading to subpar retail results across many of their brands and too much debt.”
The cash generated from selling off parts of its portfolio has already helped it pay off some of those obligations and invest in the more profitable parts of its business, including the recent multiyear $250 million redesign of Saks Fifth Avenue’s Manhattan flagship. A fresh influx would allow it to continue to do so and potentially begin revitalizing the Hudson’s Bay chain in Canada.
“I think this is a great way for them to generate some additional revenue and allow them to really focus, because they’ve done a great job turning the Saks banner around, and right now, they have to focus on the HBC banner, which at some point years ago was the mother ship, and it’s kind of slipped away,” said Farla Efros, president of the consulting group HRC Retail Advisory.
Last quarter, Saks’ comparable sales were up 3.9%, while HBC’s overall sales were down 1.4%.
But while the benefits to HBC might be clear, less obvious is who might be a potential buyer. Its department store peers are largely struggling to pay off piles of debt and looking to reduce their physical footprints, and a major acquisition would weigh even further on their balance sheets.
One alternative could be the sale of the chain’s real estate, piece by piece. “I do think it’ll be more of a real estate play where different retailers that are hoping to either get into the New York market or get into certain areas could sit there and go, ‘OK, this is a great fit,'” said Efros.
Lord & Taylor has 45 stores, mostly in malls in the Northeastern and mid-Atlantic regions, as well as e-commerce operations, and last year generated revenue of 1.4 billion in Canadian dollars (about $1.04 billion).
“Urban locations will be much more attractive than suburban locations as potential suitors would find downtown real estate more valuable,” said Winder, adding that finding a buyer for the retail business might be more challenging, given that midrange department stores such as Lord & Taylor, Macy’s and J.C. Penney have faced particular headwinds in recent years.
A private equity buyer could swoop in, he said (although recent history is riddled with cautionary tales about where that route can end) or, added Efros, a surprise overseas buyer could come out of the woodwork.
In the meantime, the chain’s operations will continue online and in stores, Foulkes said in a statement. “Lord & Taylor is a storied brand that has stood for quality, style and service for many years and serves a highly engaged, loyal customer base through a dedicated team of associates.”
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