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With his department stores on the upswing, Richard Baker, chairman of the Hudson’s Bay Co., continues to bet on the format.

This story first appeared in the November 16, 2011 issue of WWD.  Subscribe Today.

“We have recently invested $3 million to open two new Lord & Taylor Home stores, a natural extension of the Lord & Taylor brand,” Baker said at the summit. “If we get this right, we could have a $1 billion opportunity” to roll out the format.

Then there’s a $5 million investment to open the first Topshop store inside The Bay department store in the Yorkdale section of Toronto as the exclusive franchisee in the country. “If it doesn’t work, we lose $5 million. If it does work, we are on our way to building a $300 million business and driving new customers to The Bay.” With one permanent Topshop open as well as three Topshop pop-ups in other Bay stores, additional units are contemplated for other locations, which generally have too much space and need to increase productivity.

To that end, Baker noted that more than $300 million has been invested in store renovations at The Bay and Lord & Taylor divisions. “We plan on spending another $500 million over the next three years,” Baker disclosed.

“Business has never been stronger,” he said. “Over the past two years, Lord & Taylor sales are up over 20 percent and at The Bay, after 20 consecutive years of negative comps, we are trending this season at a positive comp of 10 percent. Our overall EBITDA [earnings before interest, taxes, depreciation and amortization] has risen from $165 million to $500 million.”

The Lord & Taylor Home stores, in Paramus and Shrewsbury, N.J., sell upscale kitchen, bedding and bath products and are being merchandised by Home Outfitters, which operates in Canada and is another division of the Toronto-based Hudson’s Bay Trading Co. A year ago, the Lord & Taylor flagship in Manhattan reconfigured its ninth floor into a home department with offerings from Calvin Klein, Ralph Lauren and Jonathan Adler, among other brands.

Baker, a real estate developer wearing a new hat as a retailer, took his first big bet on department stores in 2005 when he “saw the world changing and a huge opportunity to buy some large retailers that owned their own real estate.”

He was attracted to Lord & Taylor as a “dusty, old brand” that could be improved and had a “fabulous portfolio of properties” including the 650,000-square-foot Fifth Avenue flagship. Baker’s firm, then called NRDC, bought L&T for just over $1 billion, and he was met with skeptics who said he was in it for the real estate and wouldn’t support the retail operations.

Subsequently, Baker’s company took a 20 percent interest in Hudson’s Bay, again attracted by the real estate, particularly The Bay flagships in Toronto, Vancouver, Montreal, Calgary and Ottawa, that added hidden value to the company. “Public companies were giving very little credit to the real estate that retailers owned,” he said. Subsequently, the balance of the $7 billion, 650-unit Hudson’s Bay was purchased and later shrewdly paid off through the sale of 188 leases of Zellers, a former division of Hudson’s, for $1.8 billion to Target Corp., or 18 times the EBITDA of Zellers.

“I’ll be the first to admit that before we bought Lord & Taylor, I had no understanding of the customers’ attachment to the brand. The same goes for The Bay,” Baker said.

But as the weeks went by, “I was accosted in the stores by cultlike customers. They needed Lord & Taylor — whatever it was, our unique location in their town, a trusted sales associate, shoes, special sizes, an experience they had shopping with their mother 20 years earlier. They explained to me in great detail what they liked and what they didn’t. I kept thinking why are they shopping with us if they have so many issues. And then I understood. As long as we were trying and making progress, they would stick with us. That is the magic of a strong brand. Customers stick with you through ups and downs if they have brand affection.…Now I am more concerned with protecting the Lord & Taylor and Hudson’s Bay brands than anything else we do. Both of these brands are rich in history, culture, tradition and, most importantly, customer affinity.”

His investment strategy for department stores was guided by a three-point philosophy: the value of real estate in retail, the importance of a brand and taking risks and being willing to fail. “If you never fail, you are not pushing the envelope hard enough. Real estate developers have a highly tuned sense for risk versus reward.” Aside from L&T and Hudson’s Bay, Baker’s firm did invest in Linens-N-Things and Fortunoff, both of which were liquidated.

“If you don’t have a good instinct for what will work and be profitable, you will run out of money very quickly,” Baker said. “Real estate developers are accustomed to risking small amounts of money to make very large returns. At the company, we talk about being fearless. Fearless does not mean taking crazy risks. Fearless means having the courage to look at things differently. It’s this type of thinking that we are conveying to our team at all levels.…The trick is to fail small and win big.”

He’s become a believer in department stores, which still have their fair share of detractors. “When the VCR was invented, that was supposed to be the end of movies theaters. When online shopping was introduced, that was supposed to be the end of brick-and-mortar. But what the pundits always seem to forget is that it’s really all about entertainment. It’s really about an experience. People want to get out of their houses and be entertained. Department stores are about entertaining our customers with a wide array of products, services, brand experience and, yes, a great deal.”

Department stores, Baker added, are not as vulnerable to fashion risk as vertical retailers. “The large swings in sales at vertical retailers don’t occur in department stores.”