HBC retail concept gets reformatted for U.S. expansion

As he mulls taking Hudson's Bay Co. public this year, the U.S. owner of the iconic department-store retailer is turning his attention to a risky but potentially lucrative specialty-store expansion.

Richard Baker, a Purchase, N.Y.-based real estate heavyweight, will roll out HBC's Home Outfitters chain by testing two new upscale home-goods stores in New Jersey starting in late summer. If successful, he will take the concept - dubbed Lord & Taylor Home after his U.S. department-store chain - farther afield in the United States.

It's part of a wider strategy to capitalize on HBC's core strengths in fashion and housewares by branching out into specialty-store retailing. The company intends to use some of the $1.8-billion-plus it got this year for selling its Zellers stores to U.S. titan Target Corp. to finance specialty-retail acquisitions and new concepts.

The strategy could face headwinds in the U.S. marketplace, where recession-battered consumers remain reluctant to spend and the housing market - which spurs home-goods purchases - is still under water for the most part. Nevertheless, the well-heeled shopper has recovered faster than others.

Mr. Baker knows better than most about gambling on U.S. home-goods merchandising. He was a minority investor in retailer Linens 'N Things, which went into bankruptcy protection during the recession although it remained profitable in Canada. And he picked up the high-end home chain Fortunoff in bankruptcy only to see it collapse in the downturn.

Now he's betting that the headway he's made at HBC's Home Outfitters and the Bay since he acquired their parent in 2008 will serve him well in new specialty ventures.

"We'll incur these costs knowing there could be greener pastures," said Fritz Winans, president of HBC's specialty retail division. "Anything that we're going to get into, we're going to believe it's going to have significant enough potential - otherwise we're not interested in getting involved in it."

Mr. Baker has enjoyed signs of improvement at his privately held HBC. Its 69 Home Outfitters stores turned a corner in 2009, moving into the black from red, Mr. Winans said. Same-store sales, which had been on the decline when the chain was purchased, rose in the single digits last year.

After years of struggle, the parent company more than doubled its profit in 2010 from two years earlier, thanks to cost-cutting and re-focusing on more profitable areas while winding down others, a spokeswoman said. Expenses also were trimmed at Mr. Baker's upscale Lord & Taylor department stores..

Still, Mr. Baker faces stiff competition in specialty home goods, particularly in the U.S. northeast where rivals such as Crate & Barrel are well entrenched, said retail strategist Anthony Stokan of consultancy Anthony Russell and Associates. "There are several significant challenges in introducing any large-scale retail concept in the American marketplace right now," he said.

The U.S. housing market is still soft, prompting less need for consumers to buy products for their homes, Mr. Stokan said. And it's tougher for a retailer to gain traction by launching a new banner rather than acquiring an established player, he said. Lord & Taylor has built a solid reputation as a revitalized fashion brand, but will need to work at becoming a destination for home goods.

Despite the challenges, Mr. Baker is eyeing specialty retailing opportunities for future growth. The company revamped Home Outfitters in the past year, adding high-end brands such as Nespresso coffeemakers and, soon, Ralph Lauren bedding. It recently introduced a pet department, including beds and bowls for Fido, in response to burgeoning demand in that segment.

Within driving distance of New York City, the two test home stores will carry pricier brands as well as less costly private labels. If they take off within about five months, the company will expand them in the U.S. northeast and eventually across the United States, Mr. Winans said. Some industry observers envision more than 100 U.S. stores eventually.

Beyond Lord & Taylor Home, Mr. Baker is discussing internally other specialty retail opportunities, among them adopting formats from other countries and launching them in Canada, Mr. Winans said. He's looking at both acquisitions and fresh rollouts for North America.