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The Price of a Store: Federated Puts $1.2B Value on Lord & Taylor

Federated Department Stores' $1.2 billion tag for Lord & Taylor is within Wall Street's range, but some feel the price may be too high.

NEW YORK — The price to buy Lord & Taylor has been set and it’s a steep one: $1.2 billion, to be exact.

While the price to buy the department store chain from its parent Federated Department Stores Inc. is within Wall Street’s valuation range of Lord & Taylor’s real estate, some observers, including one private equity executive, believe the asking price may be too high.

Federated put the 49-unit Lord & Taylor on the block in January after deciding the retailer didn’t fit into its strategy to build up its Macy’s and Bloomingdale’s nameplates into more powerful national brands. The group acquired Lord & Taylor last year through its $17 billion purchase of May Department Stores.

Federated is asking $1.2 billion for the Lord & Taylor operation, according to a financial source who has seen the book. The business had sales of $1.56 billion in 2005 under the leadership of Jane Elfers, president and chief executive officer, who has been trying to revive growth at the company.

A spokesman for Federated declined comment on the asking price, but said the company still expects to complete its divestiture of Lord & Taylor by the end of 2006.

Deborah Weinswig, retail analyst at Citigroup Global Markets, said most of the value of Lord & Taylor is in its New York flagship on Fifth Avenue at 38th Street. “The flagship is about 611,000 square feet, which we estimate has a value of $611 million at $1,000 a square foot, excluding air rights. The real estate value for the remaining Lord & Taylor stores is $509.9 million,” she said.

Weinswig believes the value of the real estate alone could be about $1.12 billion. Presuming a tax rate of 37.7 percent, Federated would net $698.3 million on an after-tax basis, according to the analyst’s estimates.

Adding in the value of both the Lord & Taylor business and the air rights to the flagship could possibly push the purchase price higher and closer to the $1.2 billion being sought by Federated, observers said.

Industry sources with expertise in real estate said those air rights, which Federated owns, could be valued as high as $700 million. Another financial source said that because the site does not have landmark status, a developer could take over the site and convert it to a hotel/condominium, with a retail space component on the ground floor.

This story first appeared in the May 8, 2006 issue of WWD.  Subscribe Today.

The speculation among some real estate specialists at private equity firms is that a real estate developer working with a private equity firm is the most likely buyer of Lord & Taylor. They don’t believe there is a strategic player that would be willing to buy the entire operation.

But there might be several strategic players interested in buying the Fifth Avenue flagship alone. For example, it is no secret that Nordstrom Inc. wants a presence in Manhattan. “We’re certainly interested in being here,” said Pete Nordstrom, president of Nordstrom, last week during a luncheon here for British designers. Nordstrom outlined several possibilities for his company, including the Fifth Avenue flagship of Lord & Taylor.

One private equity executive, whose firm has passed on buying Lord & Taylor, nonetheless believes there’s still value in the nameplate. His company passed on the opportunity because of the complexities the deal would entail, such as the amount of money needed to operate the chain and figuring out how to parcel out the real estate. He pointed out there are still some not-so-great locations that should be closed, but noted the problem is “if you shutter too many stores then you run the risk of not having enough size and scale to operate at an optimum margin level.”

The executive thought the flagship should be worth only around $325 million. He pegged a total valuation of Lord & Taylor at $800 million, a valuation that includes the real estate and retail operation. While he thought the lack of landmark status might push the price higher if there was a bidding war, he pointed out the value of the air rights could ultimately depend on who bought the property and how high a building might be planned for the site.

Howard Davidowitz, chairman of Davidowitz and Associates, a national retail consulting and investment banking firm, isn’t sure there is that much life left in the Lord & Taylor business. “The performance of Lord & Taylor over the last four or five years has been terrible. The [operation] has been repositioned to a younger, more contemporary business and while it is more focused and further out on the fashion curve, it still continues to lose market share. I really don’t see it as a viable competitor.”

Davidowitz, who saw what happened to the retail nameplate Alexander’s when he was an adviser to Vornado Realty Trust, believes the Fifth Avenue flagship is worth about $350 million. He said he could see some of the Lord & Taylor stores, excluding the flagship, being sold to a retailer such as Nordstrom.

While he believes Federated won’t sell the flagship to Nordstrom, he said a real estate investment trust like Vornado could buy the site and then turn around and resell it to Nordstrom.

One reason why Davidowitz doesn’t foresee Federated selling the flagship to Nordstrom is that the Seattle-based retailer could then become a formidable competitor to nearby Macy’s on 34th Street and Sixth Avenue and Bloomingdale’s on 59th Street and Lexington. “If Nordstrom had the Fifth Avenue location, it would double the volume in that store in two years,” he said.

Lord & Taylor Units
State
Units
Gross Square Footage (‘000)
New York, excluding the Fifth Avenue Flagship
9
1139
New Jersey
12
1586
Illinois
5
606
Massachusetts
4
483
Maryland
5
623
Virginia
4
489
Pennsylvania
2
240
Michigan
2
285
Connecticut
4
465
Florida
1
120
Total, excluding flagship
48
6,036
From data compiled by analysts at Citigroup Global Markets.