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NEW YORK — In an unprecedented downsizing, Lord & Taylor will close 32 low-volume stores, dismantling much of a misguided expansion through the Sun Belt during the Nineties and returning its focus to core Northeastern and Midwest markets to seek better profitability.

About 3,500 L&T associates will lose their jobs. Included in that figure are 190 jobs at Lord & Taylor’s flagship here and distribution center in Wilkes-Barre, Pa. Such areas as finance, public relations, visual, restaurant services and advertising were reportedly hit.

This story first appeared in the July 31, 2003 issue of WWD. Subscribe Today.

According to analysts, L&T is marginally profitable, and the least profitable of all the divisions of May Department Stores Co. Filene’s and Robinsons-May are considered the top-two money-makers, though the performances of the divisions are in close proximity.

The St. Louis-based May Co. said in its announcement Wednesday that the cutback was another step in L&T’s strategic repositioning over the past three years into a more upscale retailer emphasizing better and bridge fashions, including such lines as Kate Spade and Bobbi Brown beauty products.

In an interview, Jane Elfers, president and chief executive of Lord & Taylor, said, “We have repositioned our merchandise assortment, our sales promotion and marketing. We’ve updated the look of our stores. They’re cleaned up and have new visuals, and now we are repositioning our real estate strategy. It’s always a difficult decision when people are involved, but it’s a proactive decision for the future success of L&T.”

The restructuring will shave L&T down to 54 stores in 11 states and Washington, D.C., with St. Louis the most western remaining location. Currently, L&T has 86 stores in 19 states. The nameplate remains nationally known and the corporation’s most fashionable division.

The downsizing also leaves L&T with a simpler buying strategy. A separate warm climate buying program will no longer be required and buyers will be relieved from trying to convince vendors to ship sites that sold little merchandise. L&T will follow a real estate path that comes closer to other higher-priced specialty chains, such as Saks Fifth Avenue and Neiman Marcus, which have been far more restrained in their expansions. Neiman’s has 35 stores and Saks has 60.

May shares vaulted $1.01, or 4.3 percent, to close at $24.46 in New York Stock Exchange trading Wednesday. By comparison, the Standard & Poor’s retail index contracted 0.4 percent and concluded the session at 335.90.

The L&T stores to be closed represent about 19 percent, or $400 million, of the division’s $2 billion in sales. The vast majority of the stores were opened under a different May Co. regime led by chairman and ceo David Farrell, and L&T ceo Marshall Hilsberg. The current management led by Gene Kahn, May Co. chairman and ceo, and Elfers will try to sell off the L&T leases over the next several months. This presents an opportunity for retailers seeking to enter malls, such as Target and Hennes & Mauritz, and to a lesser degree Kohl’s, which tends to open stores about half the size of L&T units and generally avoids malls. Another possibility is Nordstrom, which is believed to be interested in moving into the Aventura mall in north Miami, among the locations being vacated by L&T. In addition, it’s likely that stores already in the malls might want to shift locations to gain space, and regional retailers, such as Bon-Ton, Elder-Beerman, divisions of Saks Inc. and Galyan’s would examine sites.

Other high-profile locations being vacated by L&T include the Houston Galleria; Atlanta’s Mall of Georgia and Phipps Plaza; in Florida, the Town Center at Boca Raton, Ft. Lauderdale’s Fashion Mall and in the Miami area, the Aventura and Dadeland Malls; Cherry Creek Mall in Denver; downtown Pittsburgh; and, in the Dallas area, NorthPark Center, and The Shops at Willow Bend. May Co. does not plan to use any of the locations for its other divisions. In many of the malls, May Co. has two anchors, with L&T and another division at either end.

“It’s an unfortunate situation we found ourselves in,” Kahn said in an interview. “I’m saddened to divest 32 Lord & Taylor stores and two others [Famous-Barr in Des Moines and a Jones Store in Omaha] and feel badly for the 3,700 associates. On the other hand, it positions May to enhance its performance for the balance of this year and going forward. I think it’s a good decision.”

The process of divesting stores will take a long time, Kahn added, noting that the company began speaking to developers right after the announcement went out on Wednesday.

Discussing the expansion strategy, he said the bulk of the stores opened in the Nineties, though some opened as recently as last year, but they were all planned for before he was running the corporation. “I don’t think single stores in individual markets was a successful strategy. Lord & Taylor couldn’t generate a tremendous amount of sales,” or the critical mass to sustain costs, said Kahn.

Moreover, Kahn said “a repositioning in an economic downturn and with deflation is quite arduous,” and in L&T’s more remote markets, “it would even be more difficult.” As a smaller chain, “we will be able to move faster to the finish line.”

Asked if more stores from other divisions might be closed, he replied, “We are very comfortable closing only two locations,” adding, “We really put all of our stores under a critical eye to look at operating efficiencies of each location.”

Asked if L&T could in the future once again be viewed as a national vehicle, Kahn said, “We want to be an upscale fashion chain with stores operating primarily out of the Northeast and Midwest. That is where our core competence and our greatest customer perception and acceptance lie. In these difficult times, this will be a more successful strategy.”

The store divestitures will result in asset impairment, severance, and other charges of approximately $380 million, of which approximately $320 million, or 70 cents per share, will be recorded in the 2003 second quarter ending Aug. 2. About $50 million of the $380 million represents the cash cost of the store divestitures, not including the benefit from future tax credits.

May expects annual savings from these divestitures to be approximately $50 million, or 10 cents per share, of which $20 million will be realized in the second half of 2003.

The repositioning also involves attempting to make shopping easier with more edited assortments and wider aisles, developing gifts into a significant business, higher-caliber direct-mail fashion catalogs and advertising, and recently, L&T’s first-ever accessory week.

“They never should have opened all these stores. This was an unchecked expansion with no real strategy behind it,” said one analyst. At several of the stores slated to shut down, “You are not even talking $100 a foot” in sales, the analyst added. On average, the 32 stores yielded just $12.5 million in sales. Surviving L&T units yield $30 million per door, on average.

The downsizing is a sign that the current management “is not entirely asleep at the switch,” said Christine Augustine, retail analyst, Bear Stearns. “My frustration with May is that its business has been very tough for a long time. They’ve been losing share to Kohl’s and Penney’s and haven’t done anything dramatic. So this is a positive. But if Lord & Taylor is supposed to be the premier division, trying to move back upmarket, I wonder if disposing 38 percent [of the business] works at cross purposes, though it does position you with a base in key markets to grow from.”

She characterized L&T as “a laggard” to the overall May Co. profitability, with L&T sales per square foot down almost 20 percent in the last two years, to $171 in 2002 versus $207 in 2000. L&T branch locations range from 110,000 square feet to 140,000 square feet in size.

“I believe the repositioning concept May has for Lord & Taylor is sound, in terms of contemporarizing the business on a Nordstrom-esque level, but it will play best in a more limited range of locations,” said Arnold Aronson, managing director of retail strategies, Kurt Salmon Associates.

Deborah Weinswig, broadlines analyst at Smith Barney, said, “From the discrepancy between the percentage of stores and percentage of sales, it’s clear they made a good decision. This will allow them to be closer to Nordstrom in terms of how they position the stores. In the past, L&T had problems getting some better vendors to sell them because of the stores and their quality. This could help — maybe not tomorrow — but over the long term.”

The affected stores are in markets where L&T usually has one store, though a few southern and more western markets do have two or three L&T locations, such as Houston and Denver, each with three. L&T is vacating Texas, Florida, Colorado, Georgia, Kentucky, Louisiana, North Carolina, Ohio and Rhode Island.

Kahn added, “We are very pleased with the repositioning results that Jane and her management team have achieved in Lord & Taylor’s core markets. As a result of today’s actions, we fully expect Lord & Taylor’s cash flow and return on investment to show a marked improvement, enhancing its contribution to May’s total performance.”

Jewelry designer Richard Graziano, of R.J. Graziano, which supplies L&T, said, “Most department stores are overstored anyway. They do most of their business in 20 percent of their stores. I’m not shocked about this announcement. If it makes for a healthier store, it’s great. It sounds shocking, but it’s really not.”

Graziano said, “L&T’s repositioning is fantastic. There is need for a bridge to better store. I don’t think there is much competition in that area. The repositioned stores have a nice merchandise mix, they’re clean, there’s a real attention to the fixturing, and you have to remember where they were.”

Lord & Taylor, founded in 1826 as a dry-goods store on Catherine Street in lower Manhattan, in the Forties and Fifties blossomed under the leadership of Dorothy Shaver, the first woman to run a major store. It became one of the most innovative fashion retailers, launching American design talent under the banner “Lord & Taylor presents,” pioneering petites with a department for women 5 feet 4 inches and under, and devising the familiar signature handwritten advertising logo.

May Co. currently operates 446 department stores under the names of Lord & Taylor, Famous-Barr, Filene’s, Foley’s, Hecht’s, Kaufmann’s, L.S. Ayres, Meier & Frank, Robinsons-May, Strawbridge’s, and The Jones Store, as well as 191 David’s Bridal stores, 259 After Hours Formalwear stores, and 10 Priscilla of Boston stores.

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