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Report on Business Hudson’s Bay looks to put troubled Lord & Taylor on the block

Hudson’s Bay Co. is considering selling its troubled U.S. Lord & Taylor chain, the victim of a weakening department-store segment as consumers increasingly shop online or at lower-cost rivals.

The Toronto-based retailer, whose chains include its namesake and Saks Fifth Avenue, said on Monday it is pursuing “strategic alternatives” for Lord & Taylor’s operations, which could lead to a possible sale or merger as part of its strategy to focus on its best opportunities.

HBC has struggled to improve Lord & Taylor’s disappointing results, having raised $1.1-billion this year by selling its iconic flagship store in Manhattan to office-sharing startup WeWork Cos. Fourth-quarter sales at HBC’s division that include Lord & Taylor fell 5.2 per cent at stores open a year or more. Those same-store sales are considered an important retail measure.

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Richard Baker, executive chairman of HBC and a U.S. real-estate expert, acquired Lord & Taylor through his private equity firm in 2006 for US$1.2-billion and, two years later, snapped up HBC for just a little more, most of it with debt, gaining efficiencies and enjoying signs of a turnaround. But after the recession and the purchase of other retailers, HBC was hobbled by a slow economy, its own missteps and consumers’ shifting shopping habits.

Industry observers said it will be tough for HBC to get a good price for Lord & Taylor. Department-store retailers are grappling with changing shopping habits and the rise of e-commerce. Landlords face excess retail properties as merchants shrink the size of their stores or close shops altogether.

“Now is not really the best time to get the maximum value for retail because it’s going through a major transformation,” said Alex Arifuzzaman, founder of retail real estate adviser InterStratics Consultants. “The traditional department store of the eighties and nineties – that era has sailed away.”

He said an increasing number of retail properties is being converted to non-retail uses, such as fitness centres, dentist offices, call centres, restaurants or office-sharing spaces, which is what a potential buyer of Lord & Taylor stores may do. Some vacant retail space is simply being torn down and converted into residential or office space.

Sam Winberg, founder of real estate brokerage Retail CND, said the timing isn’t great to be selling off large stores. “There is a lot of large-format retail space available across North America, whether it was Sears or J.C. Penney closing stores.”

Still, he said Lord & Taylor has some good real estate that could be attractive to some buyers.

With 45 stores that generated $1.4-billion of sales last year, Lord & Taylor operates in the U.S. Northeast and Mid-Atlantic and online. Two years ago, it teamed with Walmart Inc. to sell its Lord & Taylor merchandise on its website.

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Under Helena Foulkes, who came to HBC as chief executive in early 2018, the retailer has made bold moves to try to turn around HBC’s fortunes. She oversaw the sale of half of the company’s money-losing European operations and its Lord & Taylor flagship store in New York. Ms. Foulkes also decided to close unprofitable Lord & Taylor and Saks OFF 5th stores and all 37 Home Outfitters outlets in Canada.

In its fourth quarter ended Feb. 2, HBC posted a $226-million loss from continuing operations compared with a profit of $180-million a year earlier. Sales fell to $2.9-billion from $3.1-billion.

On a positive note, sales increased at HBC’s luxury Saks stores – those same-store sales increased 3.9 per cent and its e-commerce business was up 8.7 per cent. But those critical sales fell 2.1 per cent at discounter Saks OFF 5th and, overall at HBC, declined 1.4 per cent.

Doug Stephens, founder of futurist Retail Prophet, said HBC needs to do more to reinvent the department-store model, following the lead of U.S. counterparts such as Nordstrom Inc.

Squeezed by internet sellers on one side and specialty retailers on the other, HBC has yet to answer the most critical question it faces: “Why anyone under 50 should want to visit a department store,” especially one in the mid-priced category, he said.

HBC has been under pressure from activist investor Jonathan Litt to sell off more of its businesses and real estate, including its valuable Saks flagship in Manhattan.

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HBC said it has hired PJ Solomon as its financial adviser for the Lord & Taylor review.

In Monday trading, HBC shares were up 2.44 per cent, closing at $7.57 on the Toronto Stock Exchange.

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