“It is a moment of transition. It’s not the end or radical change.”
That’s Richard Baker, executive chairman and governor of the Hudson’s Bay Co., giving his take on the current state of the retail industry.
“We need to have fresher, new content in our stores, improve the quality of the experience online and the in-store experience and better marshal the data,” said Baker, during his surprise appearance at the summit on Tuesday.
Baker suggested HBC has a wealth of untapped data — “like a huge oil field sitting just below the surface” — that will be crucial in helping to better plan and market the retail businesses he oversees.
Baker’s appearance at The Pierre was just 12 minutes long, but most timely considering earlier in the day, he announced that HBC is selling the Lord & Taylor flagship on Fifth Avenue for $850 million to WeWork Cos. and is getting an equity investment of $500 million from Rhone Capital representing a 21.8 percent stake in the retailer.
The 650,000-square-foot Lord & Taylor flagship will continue in the entire building through the 2018 holiday and be downsized to 150,000 square feet. The site will serve as the New York headquarters for WeWork.
The transactions result in 1.6 billion Canadian dollars — or $1.26 billion — of debt reduction and/or incremental cash and an increase of total liquidity of about 1.1 billion Canadian dollars.
The deal, he said, came about after spending time with Adam Neumann, chief executive officer and cofounder of WeWork, and taking walks together in different parts of the world, from Berlin to Long Island. “We talked about future of retail, the future of Millennial behavior and cityscapes. One of the conclusions we came to is that the key to retail going forward is making it exciting and interesting and the center of the community.”
He characterized Neumann as “a fascinating thinker and great strategist. In seven years, his business is now worth $20 billion,” Baker said, adding that WeWork has been opening a million square feet a month in new locations.
“We made a strategic relationship between HBC and WeWork to roll out WeWork around the world. Our first four transactions are a downsized L&T store on Fifth Avenue, Vancouver, Toronto and Frankfurt.” In each of the latter three locations, HBC is leasing WeWork the top two floors. “WeWork will pay market rent in floors that no one ever thought had any value,” Baker said. “We will drive all those Millennial customers (through the selling floors) and create tremendous excitement in our retail locations.” Baker noted that among HBC’s 450 retail locations in North America and Europe, there is opportunity to create a lot more space for WeWork and monetize the HBC real estate, though at this point, he doesn’t know precisely how many locations could be involved.
HBC has largely grown through acquisitions, starting in 2006 with Lord & Taylor and from there purchasing Hudson’s Bay, Saks Fifth Avenue and Kaufhof, and other businesses.
“We bought a bunch of old tired department stores in many cases and we want to make them exciting. We want to reinvent them. One of the ways to do that is to bring in other uses,” Baker said. “In Canada, we launched Topshop inside department stores. We have Kleinfelds in Toronto. We have opened up food halls, restaurants, catering facilities and in addition to rolling out younger, better brands, we will be rolling out WeWork.”
But not inside the Saks Fifth Avenue flagship in Manhattan, Baker said. “That is one of the most productive buildings in the world, and we are actually spending $250 million renovating that building. A chunk of the money is to make the store bigger. With other stores, we will make them more exciting with other users.”
The sale of the Lord & Taylor flagship raises questions about the future of that venerable retail nameplate.
“Retail is a tale of two cities,” Baker said, addressing the issue. “There are going to be winners and there are going to be losers. With Lord & Taylor, what was perceived as a weakness — not having a national footprint and not enough stores — surprise, that is going to be our strength. We have approximately 49 (Lord & Taylor) stores. Maybe we have a little bit less (going forward), but in very good demographic areas. Then we are going to partner up with other opportunities to grow our presence online. L&T is going to have a very small, high-quality footprint of brick-and-mortar stores and a very large footprint of online dot-com. L&T might be very well one of the best operating department store performers because of the opportunity it has ahead of it.”
Baker’s bullishness didn’t stop there. He said the Hudson Bay department stores in Canada is now the sole national department store with the demise of Sears Canada, that Hudson’s Bay has had a 50 percent comp increase since his company bought the business in 2008, and that for the last seven years, comps are positive. “We are very bullish on Canada. Now that Sears Canada is liquidating, Hudson’s Bay is the only national department store in Canada.
Regarding the state of the industry, “I think we are in a moment of absolute transition,” Baker said. “All of us have to spend time thinking about how do we reinvent, how do we reactivate.”
He said HBC is focused on making “big, powerful strategic relationships around the world, big meaty relationships with people we respect, people we trust and that is something we have done consistently around the world. We are going to move as fast as we possibly can.” If a company as large as Amazon can move fast, there’s no reason why HBC can’t move as fast, Baker said.
He echoed what he’s said before about how HBC is basically structured in three parts. First, HBC is a retailer. “Being a retailer, that is too tough. Man that is tough,” Baker said.
“The second business we are in is the real estate business. That’s not as tough. It’s a place where we can make a lot of money.
“The third business we are in is the merger and acquisitions business. When business is flat and sales and EBITDA [earnings before interest, taxes, depreciation and amortization] are flat, you can acquire and squeeze expenses, and drive top line and drive value to the bottom line.”
Currently, “I am really, really focused on strengthening our existing businesses,” Baker said. “Today is a monumental day for HBC. We raised $1.6 billion in cash to pay down our debt and now our operating company will have $385 million in cash and no draw on our over $2 billion ABL (asset based loan) which gives us tremendous financial strength.”
Baker is also interim ceo of HBC, since the departure of Jerry Storch last week. A search for a replacement is under way. Asked what attributes HBC’s next ceo should have, Baker first said the company continues to strengthen its bench and move people around, from business to business, to cultivate talent.
In the process of finding a new ceo, he’s looking for someone who, among other skills, would be strong in utilizing data to drive better results, developing exclusive content in every market where HBC operates, and who could bring new experiences to stores and online. “For a ceo, someone who is really strong in any one of those three categories along with the balance of our team is a successful situation for us,” Baker said.