The NRDC Agenda: After L&T Deal, More Retail Buys Ahead

Federated Department Stores announced the sale of the Lord & Taylor chain to NRDC Equity Partners for $1.19 billion in cash.

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NEW YORK — The retail scene has another major player.

NRDC Equity Partners said Thursday that it has agreed to purchase Lord & Taylor from Federated Department Stores for $1.195 billion and has at least one more retail deal in the works that could be completed this year. Among the properties the company could examine is Saks Fifth Avenue, which is not officially up for sale.

“Our approach is not to wait for a process to be created. We started working on Lord & Taylor before it was put up for sale, before there was a process,” said Richard A. Baker, president of NRDC, in an interview Thursday.

He wouldn’t specify any deals in the works, but said another will happen this year.

NRDC met Federated’s expectation for getting at least $1 billion, and intends to continue to operate L&T.

Last year, NRDC Equity bought Linens-N-Things for $1.3 billion, and in the past year, the partnership has examined Toys ‘R’ Us, Pathmark, Burlington Coat and Hudson’s Bay. However, those businesses were bought by other concerns.

“NRDC is interested in acquiring high-quality retail brand companies that have a real estate perspective,” Baker said. “We look at every retail situation.”

The deal to sell Lord & Taylor moved relatively swiftly. After Federated put the retail chain up for sale in January, Federated said L&T was attracting a good amount of interest. Federated expects to close the all-cash deal in the third quarter of this year.

The agreement brings some relief to the team at Lord & Taylor, as well as vendors supplying the chain. While it’s clear now that Lord & Taylor will continue to operate for a while, a telltale sign of whether it has more than just a few years in its future depends on how much capital NRDC invests in renovating the stores. Much is needed to be done at the flagship and other locations to recharge the business. But the long-term future of the flagship is still in question, and there is speculation it eventually could be redeveloped. The potential redevelopment value of the flagship was one of the main attractions for bidders.

This story first appeared in the June 23, 2006 issue of WWD.  Subscribe Today.

“No way the flagship looks like it does three years from now,” said another source familiar with the property. “They will definitely do something with the building. They’ll redevelop it into offices or residential. There is too much value in the building for the volume it does not to redevelop it.”

The building is said to be worth between $300 million to $400 million, and accounts for about $140 million in sales, or 10 percent of the chain’s total volume of $1.4 billion. Other big Manhattan flagships, such as Bloomingdale’s and Saks Fifth Avenue, generate far greater percentages of their total volumes, between 20 to 25 percent.

Lord & Taylor’s new owner also would get the air rights over the flagship building, which is not landmarked, as well as a distribution center in Wilkes-Barre, Pa. According to its Web site, NRDC seeks to invest from $50 million to $750 million of equity in acquisitions that require a total investment of $100 million to $5 billion. The group is a partnership between the principals of Apollo Real Estate Advisors, a major real estate investor that codeveloped the Time Warner Center with The Related Companies, and the principals of National Realty & Development Corp., an owner and developer of shopping centers in the U.S.

National Realty & Development has more than 100 projects consisting of shopping centers, strip centers, corporate business centers and residential communities, representing more than 14 million square feet. The developer is said to have strong ties to retailers such as Wal-Mart, Target, Lowe’s, The Home Depot, Sears, Staples and TJX Cos., among others.

Changes at Lord & Taylor will occur soon, but Baker said it was too early to outline what might happen and downplayed notions of radical change. “Our intention is to run Lord & Taylor exactly as they have been running it. It’s business as usual.”

While L&T has been making moves to upgrade its merchandise, it continues to operate in the midtier department store sector that is being squeezed by the likes of Neiman Marcus, Nordstrom and Bloomingdale’s at one end and Wal-Mart and Target at the other.

Baker did not dismiss the possibility of converting some of the chain’s real estate, which he described as a mix of owned and leased stores. Among those in the 48-unit chain that are owned, besides the Fifth Avenue flagship, are the stores in Stamford, Conn., and Manhasset and Eastchester, N.Y. “In short order, we will be reviewing the entire portfolio,” he said.

Asked how much of the purchase price would reflect Lord & Taylor’s real estate value, Baker replied: “We really didn’t evaluate Lord & Taylor that way. We evaluated it as an ongoing concern with the confidence and knowledge that behind this company are strong real estate assets.”

At Lord & Taylor, Baker will become chairman, while Jane Elfers will continue as president and chief executive officer. “We will do our best to stay out of Jane’s hair,” Baker said.

While Lord & Taylor no longer will have the buying clout of the $27 billion Federated behind it, Baker noted the retailer for the past three years has worked to differentiate itself from other Federated divisions and is on the right track. “It has its own matrix,” he said.

While L&T has been downsizing and doesn’t have the momentum of competitors such as Nordstrom or Bloomingdale’s, Baker, nevertheless, characterized the chain as “very profitable and successful” and as one that is actually benefiting from the Federated-May merger. He pointed out that, as Federated continues to shed duplicate properties in malls, traffic will transfer to remaining stores in the malls, in some cases Lord & Taylor. In the Boston area, for example, Federated had two stores in each of three big malls: South Shore, Burlington and Natick. It closed one in each mall. Lord & Taylor has stores in those malls and is attracting more traffic due to the closures.

Industry sources close to L&T say the chain has picked up some momentum this past spring, having had a year of much discontinued merchandise. It also completed the closing of six poorly performing stores as of April.

In the last couple of years, operating margins are in the 5 to 7 percent range on an EBIT basis, according to sources close to the company.

While NRDC Equity Partners is new, Baker pointed out that its principals, including his father, Robert, have been in business for more than 40 years and have conducted more than $50 billion in transactions. “This is not a junior group. We’ve just created a new venue,” he said.

NRDC also is distinguished by its tie to Tri-Artisan Partners, a merchant banker that provided financial and advisory services to NRDC in the Lord & Taylor deal. NRDC also was advised by Bear, Stearns & Co. and the law firm of Stroock & Stroock & Lavan.

Generally, Tri-Artisan provides advice on mergers, acquisitions, divestitures and other financial plays, and is involved in private equity transactions. Its talent pool includes investment bankers, private equity investors and a large group of operating directors, including some well-known retailers such as Philip Miller, a former chairman and ceo of Saks Fifth Avenue and earlier, Marshall Field’s. Miller reportedly was instrumental in advising NRDC on Lord & Taylor and is currently a board director and interim ceo of St. John, helping to search for a new ceo there.

In the acquisition arena, “we can add more value, bring additional points of view and a network others don’t have for operating insights,” said Donald R. Hutchison, managing director of Tri-Artisan.

Apollo Real Estate was founded in 1993 by William Mack, a veteran real estate executive, in cooperation with the Apollo private equity fund. Apollo has overseen the investment of 10 real estate funds and joint ventures, through which it has invested more than $5.2 billion in more than 250 transactions with an aggregate value in excess of $20 billion.

The 180-year-old Lord & Taylor started as a small specialty store on Catherine Street in the Chinatown section of Manhattan. It long had a reputation for catering to high society with American designer merchandise, a strong assortment of dresses and a wholesome family reputation. But the business started to lose its panache after being purchased by May Department Stores in 1986. Under May’s ownership, L&T was subjected to a moderate matrix, became very promotional, distributed more coupons than any other New York-based retailer and came to be similar in character to other May divisions.

Federated inherited L&T, as well as May’s regional chains Marshall Field’s, Hecht’s and Filene’s, through its $17 billion acquisition (including debt) of May last year. In January, Federated put L&T up for sale, making it challenging for the team there to focus on the business. “It’s been difficult to live in a state of uncertainty. Everybody is smiling today,” said one source close to the store.

With Lord & Taylor, NRDC ultimately could follow the Mervyns model. In that case, a consortium consisting of Cerberus Capital Management, Sun Capital Partners, Lubert-Adler and Klaff Partners first purchased the operation from Target Corp., then proceeded to close many stores and divest much of the real estate, leaving a smaller, more nimble, chain operating in core South and Southwest markets.

In 2003, L&T announced it would close 32 stores, primarily in the South, and started to reposition to focus on better-to-bridge lines, and prices above Macy’s but below Nordstrom. Such lines as Liz Claiborne, Tommy Hilfiger, Nautica, Monet, Kasper suits, Playtex — more than $300 million worth of inventory — were dropped in a year. While discarding several brands, others started getting bought or played up more, including Tommy Bahama, Bobbie Brown, Kate Spade, Ralph Lauren, Michael Kors, Anne Klein, DKNY and Coach.

It is believed that Lord & Taylor has about another 10 weak locations, including units in Detroit and Chicago, that have not been performing well and could be closed. The repositioning is ongoing as the retailer seeks to shed the staid image and bolster traffic.

“This agreement concludes a successful process to divest Lord &Taylor,” said Terry J. Lundgren, Federated’s chairman, president and ceo, in a statement. “While Lord & Taylor does not fit with Federated’s strategic focus on building the nationwide Macy’s and Bloomingdale’s brands, it is a well-known niche specialty retailer with a great name, many outstanding locations and an experienced management team.” The sale of Lord & Taylor will help Federated pay down its debt, focus on Macy’s and Bloomingdale’s and repurchase shares. Federated is converting 400 former May doors to Macy’s in September. A handful of May doors are converting to Bloomingdale’s.

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