By David Moin
with contributions from Kellie Ell
 on August 28, 2019
Lord & Taylor Signage

Hudson’s Bay Co. has agreed to sell its Lord & Taylor division to Le Tote Inc., the seven-year-old San Francisco-based fashion rental subscription service, in yet another case of innovative deal-making by the Canadian-based department store retailer.

Under the terms of the agreement, Le Tote will acquire the Lord & Taylor brand and its intellectual property, operate 38 Lord & Taylor stores and Lord & Taylor’s digital channels and take over the inventory. Only five Lord & Taylor stores will be closing.

Le Tote expects to retain the majority of Lord & Taylor’s associates, which will be a big morale booster given the seasons of uncertainty that have surrounded the retailer and its future.

The deal, revealed Wednesday, confirmed an exclusive WWD report Aug. 8 that Le Tote would purchase L&T.

HBC will receive 99.5 million Canadian dollars, or $75 million, in cash upon the transaction’s closing and a secured promissory note for 33.2 million Canadian dollars, or $25 million, payable in cash after two years. In addition, HBC will receive a 25 percent equity stake in Le Tote, two seats on the company’s board and certain rights as a minority shareholder.

HBC and HBS Global Properties, which is HBC’s real estate venture with Simon Properties Group, will retain ownership of all owned and ground-leased real estate assets related to Lord & Taylor.

“We’ve put Lord & Taylor and its storied history into the hands of real visionaries,” Helena Foulkes, chief executive officer of HBC, told WWD.

“This is a great opportunity for the Lord & Taylor brand to join with a leader in technology and the rental space and ultimately create a true omnichannel experience in the department store sector. It’s a new model for Lord & Taylor, linking rental subscriptions, e-commerce and a store footprint as a new experience for the midtier regional department store. Following an extensive review of strategic alternatives, Le Tote’s leadership and innovative approach is the best path forward for Lord & Taylor, its loyal customers and dedicated associates,” she said.

HBC could also tap into Le Tote’s technology and data analysis resources to develop rental businesses for Saks Fifth Avenue in the U.S. and the Hudson’s Bay department stores in Canada. Selling Lord & Taylor enables HBC to focus more on its Saks and Hudson’s Bay stores.

Rakesh Tondon, Le Tote’s founder and ceo, said,Since founding Le Tote, it’s been our mission to push the boundaries of retail. We’ve strived to lead the charge in developing innovative, intuitive, value-driven ways for customers to engage and consume.”

“The reason we wanted to do this deal is because this is what our customer has been demanding,” said Tondon. “They aren’t just shopping online and renting online. They are going into stores. Our traditional business is the rental business, but we want to offer the customer the ability to buy or rent or do both online or in-store.”

He also said there’s a “big overlap” in the overall demographics of Lord & Taylor and Le Tote, particularly in the 35- to 48-year-old age range, though Lord & Taylor customers skew older than Le Tote. “Once we start offering rental and subscription services at Lord & Taylor, we can attract younger customers.” He also said L&T and Le Tote have many customers living in the Northeast where Lord & Taylor stores are concentrated.

“This deal gives us a much more holistic offering than any other rental brand out there,” Tondon said.

He also said the deal will create greater awareness of Le Tote and lead to big changes on the Lord & Taylor platform by providing more recommendation tools and more curated offerings. “We will try to translate those experience off-line, as well,” Tondon said.

Le Tote offers 180 to 200 women’s brands, whereas Lord & Taylor works with more than 500 brands for women’s, in addition to offering beauty, children’s and men’s. While Le Tote won’t be renting swimwear, intimates or men’s wear, he sees children’s and beauty as broadening Le Tote’s subscription service.

Lord & Taylor marks Le Tote’s foray into operating stores. Tondon said Le Tote does have some experienced retailers on its team already and that they will work with Lord & Taylor’s team to operate stores.

Integrating the Le Tote brand name into Lord & Taylor stores “is something we are working on as we speak. There is a lot of work to be done. We definitely want to keep the Lord and Taylor brand as is.”

Le Tote’s fashion subscription service lets women rent clothing and accessories of their choice and keep them as long as they like until they return them for a new selection. Members have the option to purchase items at a discount. Among the brands offered are French Connection, Vince Camuto, BCBG Generation, Kate Spade, Rebecca Minkoff and Calvin Klein. Le Tote’s data-driven model is powered by proprietary algorithms and in-house operational solutions.

One of Le Tote’s points of distinction is its maternity division, which relieves the frustration women have spending money on new clothes during pregnancy which only get worn for a short time. Le Tote operates on a monthly fee at $79; $89 for maternity rentals.

Le Tote made news about a year ago when it became the first U.S. subscription service to enter the Chinese market, considered the largest e-commerce market in the world. It’s been dubbed the “Netflix of fashion” for its rapid growth. The company, founded in 2012 by Brett Northart and Tondon, has raised venture funding from Andreessen Horowitz, Google Ventures, Azure Capital Partners, Lerer Hippeau Ventures, Simon Venture Group and others.

The company is in the process of securing financing for the deal with HBC. The transaction is expected to close before the start of the 2019 holiday season, subject to closing conditions. If committed financing has not been obtained within 45 days following signing, HBC can terminate the agreement.

For at least the first three years, HBC has agreed to maintain responsibility for the rents owed by Lord & Taylor at the locations operated by Le Tote. Net of HBC’s distributions from HBS Global Properties, HBC expects to continue to be liable for about $77 million in Lord & Taylor rent on an annual basis.

Starting in 2021, HBC and Le Tote can reassess the Lord & Taylor store network, meaning HBC could convert some locations to different uses. However, redeveloping properties is a long and complicated process so stores would stay open for a number of years after 2021. HBC has hired a team of professionals for any redevelopment. For any recaptured stores, HBC retains long-term rent responsibility, risk and costs for redevelopment.

The deal with Le Tort breathes life into Lord & Taylor, the oldest department store in the U.S. It’s been losing relevance, as a traditional regional department store chain, and has been under enormous pressure from bigger, national retailers and growing online web sites with greater buying clout and wider and younger audiences.

In fiscal 2018, Lord & Taylor generated $1.4 billion of HBC’s $9.4 billion in retail sales. HBC’s 2018 adjusted earnings before interest, taxes, depreciation and amortization was $462 million, which reflects a $119 million loss attributable to Lord & Taylor, inclusive of allocated corporate expenses.

Lord & Taylor closed its Fifth Avenue flagship in Manhattan last year and a few other unproductive locations recently. But the store still has a reputation for broad and appealing assortments in dresses, a category that works well for rental services, particularly with evening styles. Lord & Taylor also has respectable offerings in tailored clothing and suits.

Though the store overall has been faltering, L&T has some suburban locations that generate healthy sales and traffic such as in Scarsdale and Garden City, N.Y.

The transaction with Le Tote furthers a string of other bold maneuvers by Foulkes and HBC’s executive chairman and governor Richard Baker to streamline the company, improve the balance sheet and focus on the Saks and Hudson’s Bay stores. Those actions include selling Lord & Taylor’s Fifth Avenue flagship to WeWork, now known as The We Co.; shuttering Home Outfitters in Canada, and closing up to 20 Saks Off Fifth stores in the U.S. The company is performing “a fleet review” of Saks Off Fifth and could try to sell it. HBC also last year sold Gilt Groupe to Rue La La, and sold a majority interest in its European retail operations to Signa Holdings, which owns the Karstadt department store chain in Germany, and a 50 percent stake in its European real estate. The sale to Signa led to a merger of the Kaufhof and Karstadt in Germany.

Originally, Hudson’s Bay Co. and Le Tote got together to discuss a partnership involving leveraging Le Tote’s technology to get Lord & Taylor into the fashion rental business, but conversations escalated into an acquisition as well. This year a slew of stores have revealed plans to enter the rental business, with announcements by Macy’s, Bloomingdale’s and Banana Republic, among several others.

On the transaction, P.J. Solomon acted as financial adviser and Willkie Farr & Gallagher LLP acted as legal adviser to HBC. Le Tote used Citi as its financial adviser and Kirkland & Ellis LLP, as its legal adviser.

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