Venerable department store appeared on its last legs a few years ago. How new owners are changing its fortunes.
NEW YORK (Fortune) -- As tourists flooded New York City over the recent Christmas holiday, Lord & Taylor CEO Jane Elfers wanted to make sure her store got its share of the crowds. She taped a 15-second spot that ran in 3,500 taxis inviting people to visit a Manhattan landmark: Lord & Taylor's flagship Fifth Avenue store.
The building, which received landmark status in October, has housed Lord & Taylor since 1914. But all of that history and more - the company, founded in 1826, is America's oldest department store - was almost lost when Lord & Taylor was acquired in 2006 by a real estate-cum-private equity firm, NRDC Equity Partners.
To the surprise of the fashion world, Lord & Taylor avoided going the way of the leisure suit and is in the process of staging a comeback.
Back in 2006, the company's future looked less certain. Federated Department Stores had just purchased Lord & Taylor parent, the May Company, and then put Lord & Taylor on the block. When NRDC emerged as the new owner, everyone including Elfers thought it was a real estate play.
Lord & Taylor owns 22 of its 47 stores and has ground leases on another 20 locations. Many of the stores are in premier shopping malls, or, as is the case with Fifth Avenue, on prime urban blocks, making them potentially worth more than the $1.2 billion that NRDC paid for the company. According to several real estate executives, a more current valuation for the property alone is upward of $1.7 billion.
Indeed, NRDC's original plan was to carve the company up and sell off the real estate, according to people who were briefed on the agenda. NRDC Chief Executive Richard Baker, without going into specifics, admitted in a wide-ranging interview with Fortune that his initial interest in Lord & Taylor was the real estate.
"But then," he said, "we quickly realized that Lord & Taylor was a spectacular brand."
What changed his mind? Lord & Taylor's business, which had been in a downward spiral for years, started to rebound. Profits and sales soared to their highest level in 15 years. Lord & Taylor also got a lucky break. Federated, now known as Macy's, closed or re-branded dozens of stores in the Northeast, knocking out much of Lord & Taylor's competition in key cities. In 2006, according to Elfers, comparable store sales soared 30 percent in Boston and 24 percent in Washington, D.C.
"I've always believed that Lord & Taylor was worth more alive than dead," Elfers said.
A New Jersey-native with a blond bob and a cut-to-the-chase sensibility, Elfers, 46, had been waging what amounted to a one-woman battle to keep Lord & Taylor alive ever since she was named CEO in 2000. "She's the Joan of Arc of Lord & Taylor," Baker said. "She's been carrying this load, and she really saved [the company.]"
Under May's stewardship, Lord & Taylor went down market, adding cheaper goods and promoting them with frequent sales. There was little money to invest in store refurbishments. "Lord & Taylor was starved of capital," said Marvin Traub, the former CEO of Bloomingdale's, who now runs his own consulting firm.
Elfers wanted to bring Lord & Taylor back to its carriage trade roots and once again make it a beacon for American designers, as it was in the '40s and '50s. She dropped tired brands - Liz Claiborne, Tommy Hilfiger and Nautica, among them - and gave up $350 million worth of sales in the process. In their place went trendier labels, including Coach, Tracy Reese and Ted Baker. Today, Eighty-five percent of the merchandise found in Lord & Taylor wasn't there three years ago. Another brave decision was to close 32 underperforming stores in 2003.
Getting the company fully back on its feet would require money. Once NRDC became convinced of Lord & Taylor's staying power, it agreed to invest $500 million over five years on store renovations, including an overhaul of the Fifth Avenue location. Currently awaiting city approval is a plan to shrink the 611,000 square foot store by nearly half, add a boldface name restaurant (Nobu is a possibility) and office space or luxury condos above. Some $60 million was spent in 2007 on new fitting rooms, fixtures and carpeting at suburban satellite locations. More ambitious plans are in the works, including a redevelopment plan before the Stamford, Conn., zoning board to add a Whole Foods and parking garage to that location. Brian Pall, who heads NRDC's real estate group, estimated that such redevelopment will add tens of millions of dollars to the value of Lord & Taylor's properties over the next few years.
Despite those steps, Lord & Taylor still has a way to go. Like other retailers, the company has felt the pinch from a slowdown in consumer spending. Comparable store sales rose only slightly last year, a respectable showing given the weakening economy, but far from the runaway growth of 2006. Meanwhile, sales per square foot, an important measure of productivity, still hover around $290, less than the $350 to $400 of Bloomingdale's and Nordstrom, according to industry sources.
"The jury is out on Lord & Taylor's upgrading," said Abe Chehebar, CEO of the Accessory Network Group, which owns the LeSportsac and Ghurka brands. "The strategy of bringing in more upscale vendors is the right one, but the question is whether customers will come to the party."
NRDC is betting they will. The firm is using Lord & Taylor as a testing ground to rethink the entire retail supply chain. It recently purchased Fortunoff with the aim of opening Fortunoff-branded jewelry and home departments in Lord & Taylor stores, and also formed a design company to make clothes for Lord & Taylor and possibly other retailers. The company, called Creative Design Studios, has so far had some hits as well as misses. New lines by the designers Charles Nolan, who has crafted multi-million dollar collections for Anne Klein, and Joseph Abboud, known for his men's wear, appear promising. But two of the designers originally tapped to create clothes for Lord & Taylor, Cynthia Steffe, who had recently sold her company and Bryan Bradley of the Tuleh brand, have gone their separate ways. "I'm focused on other opportunities now," Steffe said. More acquisitions are expected. In October, NRDC raised $400 million through a Special Purpose Acquisition Corporation, known as a SPAC, money it has yet to put to work.
Today, even those who were Lord & Taylor non-believers see the light. "For a while, we weren't even looking at Lord & Taylor's sales when we analyzed a mall, because they had one foot in the grave," said Steven Greenberg of The Greenberg Group, which advises retailers on their real estate. "But over the last 12 months, their business has improved dramatically." Lord & Taylor, like those yellow New York City taxis, might just be an icon that's here to stay.
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