View Slideshow

TORONTO — Who says you can’t teach old dogs new tricks? Hudson’s Bay Co. is out to prove you can at two of North America’s oldest department stores, The Bay and Lord & Taylor.

This story first appeared in the July 9, 2012 issue of WWD. Subscribe Today.

The two retailers are 342 and 186 years old, respectively, and have long been the poster children for department store dinosaurs. But that’s changing, as HBC develops brand partnerships, renovates both chains, rethinks Lord & Taylor as an expansion vehicle, advances private brands, and right-sizes assortments to favor fashion, food and shoes over furniture and home products.

It’s a full-court press to turn excessive and unproductive square footage into relevant retail theater, and put a modern, sophisticated spin on a moderate business by stretching into the better priced and contemporary designer zones. “We are a good option for someone trading down just slightly from the very high end, but isn’t prepared to trade down to a discount store. We are in an excellent position, really in the better and middle markets,” Bonnie Brooks, president of the Hudson’s Bay Company, said in an exclusive interview at the company’s headquarters here.

Along with all the merchandising, the balance sheet has been cleaned up. Last year, the leases on the Zellers chain were sold to Target in a $1.84 billion deal, eliminating an underperforming division and a lot of debt piled up from past acquisitions. To further cut costs, there has been significant streamlining of staff and back-of-house integrations across divisions, led by the behind-the-scenes chief operating officer Don Watros. Brooks, who is more in the public eye, leads a single senior executive team that oversees The Bay and Lord & Taylor, though there are still separate buying teams at each division. Top managers spend about two days a week at the New York offices of Lord & Taylor and three days a week at the Toronto headquarters of The Bay.

While executives say there’s a long-term strategy for growth and modernization, HBC’s owners are looking to cash out, possibly through a public offering in the near future. “There is nothing on the radar at the moment,” said Richard Baker, governor and chief executive officer of HBC. “But it could come at any time.” Last year, the company flirted with an IPO but scuttled the plan amid market gyrations.

Hudson’s Bay Co. has revenues of about $4 billion, which excludes the soon-to-be-sold Zellers. HBC was purchased in 2008 for $1.1 billion by NRDC Equity Partners. Lord & Taylor was purchased by NRDC for $1 billion in 2006. Baker believes that “the team has turned the ship” after lumbering along for decades.

According to industry estimates, The Bay ran flat or negative comparable-store sales for 20 years until 2010, when it was up 2 percent. Last year, it was ahead 5 percent and this year is tracking at 8 percent. Lord & Taylor turned around in August 2009, and has since been up 8 to 10 percent annually. Earnings before interest, taxes, depreciation and appreciation, or EBITDA, at HBC, which also operates Home Outfitters, has risen from $105 million in 2008 to an expected $450 million in 2012.

To elevate HBC’s appeal to all three constituencies — consumers, brands and investors — and improve productivity, Baker said he’s pumping in over $1 billion in renovations over the next five years, touching all 91 of The Bay’s units and all 48 Lord Taylor units to varying degrees, though the company has been spending on renovations for the last two years, including $186 million this year. Much of the money is earmarked for rolling out Topshop franchises inside The Bay stores and other brands yet to be unveiled.

“We are talking to other retailers,” Baker said of the potential of adding in-store shops to The Bay. “We have an opportunity to leverage both our real estate and infrastructure. So if you are a retailer and want to come to Canada, we can roll you out much quicker and efficiently. It’s too expensive for many retailers to come into Canada on their own.”

Franchising, licensing or “partnering” in different ways are all possibilities, Baker said. “We are very dedicated to making The Bay an eclectic, exciting retailer. We’re all thinking long-term, not just quarter by quarter.”

Talks with brands and specialty retailers on shop-in-shops could lead elsewhere. Asked if the company was shopping other brands or retailers to acquire, Baker replied, “We are always opportunistically looking at situations. We have a very young team that’s motivated but we’re never going to overpay. When someone stumbles and the situation works for us, we will be able to take advantage.”

While it remains on the lookout for other opportunities, Britain’s Topshop is carving out a good chunk of space at The Bay, in a five-year strategy. The 14,000-square-foot Topshop at The Bay in the Yorkdale shopping center, which cost $4 million to create, is so large and visible it’s hard to tell if it’s integrated into The Bay or freestanding. Elsewhere in Toronto, as well as in Montreal and Vancouver, The Bay is creating even larger Topshop spaces — 30,000 to 40,000 square feet each, though most of the Topshop spaces through the chain will occupy 7,000 to 10,000 square feet.

“I am a firm believer that you have to make something big enough to make it compelling,” said Brooks. “It drives better sales per square foot and it’s more impactful. We have the space for it, and if we didn’t give it the space, it doesn’t have the same feeling. Topshop is the most trend-right group I have ever worked with.”

There have been other major changes at key locations, including the 240,000-square-foot Yorkdale store, which is being renovated to enable jewelry, shoes, men’s, cosmetics and accessories to be major growth areas. A grand reopening is seen in 2013.

The Queen Street flagship is also undergoing major changes, from installing Topshop to renovating men’s wear, and is close to signing an agreement for a 20,000-square-foot franchise on the seventh floor. “It will be a new fashion and home concept and another franchise for Canada,” Brooks said, declining to provide further details. Much work has been accomplished already, with the recent renovation of The Room for designer and contemporary labels, and additions of a marketplace for dining and takeout, and the transformation of The Arcadian Court on the eighth floor, known for its Deco decor, chicken pot pies and for being the largest of any department store restaurant, into a catering and event complex jointly operated by Oliver and Bonacini Restaurants and The Bay.

“Probably the biggest negotiation we’ve done for anything was to become the official retailer of the Toronto Film Festival,” Brooks said. It happened last year, when The Bay usurped the role from Holt Renfrew.

Across town, The Bay on Bloor Street strikes a stark contrast to the Queen Street flagship. It’s a tired, anemic store but an announcement about an overhaul is expected soon.

The Bay isn’t getting all the attention. WWD has learned that Lord & Taylor appears poised to return to the national stage. “We are working to develop a format relevant to major markets,” Brooks disclosed. “I see it as having a market position applicable to the West Coast and definitely to really all major markets. We are attractive to developers.” The format she has in mind will shift the emphasis toward contemporary and private labels, to expand the customer base and appeal.

In the Eighties, Lord & Taylor was a rollout vehicle, under the ownership of the former May Co. The strategy didn’t work because of several less-than-ideal locations and indistinguishable merchandising. However, Lord & Taylor’s first new full-line store to open in more than a decade bowed in Salem, N.H., last March, and in April, a new prototype with a clean, contemporary appeal, large Italian white tiles, and an asymmetrical racetrack aisle opened in Ridge Hill, Westchester, N.Y. Lord & Taylor has another opening set for Mizner Park in Boca Raton, Fla., in fall 2013.

“We’re looking to open stores, 80,000 to 120,000 square feet,” and with an assortment that’s evolving, Baker explained. “Lord & Taylor was selling product for classic customers and still is. But it’s also selling a more modern and contemporary assortment.”

In Manhasset, N.Y., Lord & Taylor will commence a $30 million renovation in January involving a 30,000-square-foot expansion, bringing the store to 170,000 square feet. “On a sales per square foot basis, Manhasset is our best store,” Baker said. “It was the first suburban department store in the country. In the suburbs, Lord & Taylor is a dominant force.”

And the Lord & Taylor Fifth Avenue flagship in Manhattan is slated for another round of renovations following the $25 million makeover completed in 2010. The flagship is in the design phase now and plans to convert the second floor to be devoted to shoes. The third floor will be renovated to cast a brighter spotlight on contemporary and other areas, and a new concept for the ninth floor is under development. The changes are expected to be officially unveiled in the second half of 2013.

Among other key maneuvers at HBC:

• An omnichannel strategy with a new platform and state-of-the-art technology will be launched this fall, for both L&T and The Bay. The strategy is geared to enable customers to shop for “whatever, wherever, whenever and however they want — in stores, online, via mobile. It’s a bona-fide omnichannel strategy and it’s expensive,” Brooks said. It involves the IBM WebSphere linking to an NCR marketing system and an IBM Sterling management system that’s compatible with the Web site for order management and locating merchandise. “Our online business will grow 75 percent in 2012 over 2011,” Brooks said.

• Creating “White Space” departments at The Bay’s important locations including Yorkdale and Queen Street featuring contemporary and better brands such as Armani Jeans, Free People, Theory, Sandro, J Brand, Vince, Elizabeth & James and Alice + Olivia. The strategy started in 2010, is currently seen in 18 stores, and will be rolled out further.

• Tripling the private label business from its current 10 percent of total HBC volume. Key brands include the Black/Brown 1826 men’s wear designed by Joseph Abboud, which started wholesaling to Belk and other stores this year; the Lord & Taylor line, which will evolve from currently primarily cashmere and sweaters to a fuller collection, and the HBC Collection, which is capitalizing on Hudson’s Bay’s coat of arms and signature stripes with a growing array of products.

Over the past three years, there has been massive culling of the merchandise matrix, with more than 800 of its 1,200 brands being dropped and 450 others with a more modern flair added. “We’ve stretched up but never let go of moderate,” Brooks explained. “We haven’t dropped anything that was performing in opening price zones.”

Among the additions in women’s have been Lauren by Ralph Lauren, Denim & Supply, Jessica Simpson, Material Girl, Jones, Anne Klein, INC, Calvin Klein, and Ivanka Trump, and in men’s, Boss Hugo Boss, Lacoste, J. Lindeberg, Ted Baker, Diesel, Strellson, Z Zegna and Puma.

The Room, a 3,000-square-foot flexible space with no hard shops features 70 labels and an edit aimed to offer designers unfamiliar to most Canadians such as Erdem, L’Wren Scott and Mary Katrantzou mixed with the likes of Giambattista Valli, Azzedine Alaïa and Nina Ricci, at the higher end of designer. The business is supported by a busy schedule of appearances by designers. Three years ago, about the most elevated brand at HBC was Jones.

“When we bought The Bay, the merchandise offering and the look of the store felt like J.C. Penney, maybe not as good,” Baker said. “There’s been an unbelievable transformation, and it’s not done. We’re looking like a better Macy’s and the changes are everywhere, at our top and worst stores. We’ve invested big money at both, which is unusual,” Baker said. “There’s a huge opportunity with productivity. We are blessed with having a very unproductive business to start with. Customers are already in the store. They’re just not buying enough.”

Baker had also considered leasing out much retail space inside The Queen Street flagship, which has 650,000 square feet for selling, more than 1 million gross, but only generates around $200 million in annual sales. As Brooks recalled, “When I first joined the Bay, Richard said, ‘Don’t worry about the space. We’ll lease out five, six, seven and eight and you can only worry about four floors,’ and I said, ‘Wait. Let’s see what we have.’ And here we are now — almost running out of space.”

As the executives tell it, it’s a reversal of fortune for The Bay, which was long saddled with an overload of unproductive space — 15.5 million square feet including seven flagships between 300,000 and 700,000 square feet. HBC owns all of its flagship locations including Lord & Taylor on Fifth Avenue and The Bay’s six flagships, and 90 percent of the retail real estate of The Bay and Lord & Taylor is either owned or ground leased.

“We need all of our space and will be using it for new and exciting things. If anything, we want to make our stores bigger,” said Baker, who grew his career in his family’s real estate business. But now he says, “I’m not in the real estate business anymore. I’m in the retail operating business, which happens to own a lot of real estate.”