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Report on Business Hudson’s Bay selling Lord & Taylor banner amid privatization battle

Hudson’s Bay Co. is selling its Lord & Taylor banner to fashion rental service Le Tote Inc., as the Canadian retailer focuses on its core namesake brand along with Saks Fifth Avenue.

San Francisco-based Le Tote has agreed to buy the Lord & Taylor brand and its inventory, and to take over operation of its digital properties and 38 stores in the United States. Five stores not part of the deal are expected to be liquidated and closed.

The deal announced on Wednesday is worth a total of $132.7-million – $99.5-million of which will be paid in cash at closing, and the rest provided in a note payable in 2021. The stores’ inventory is worth $284.2-million, according to documents filed on Wednesday by HBC, and Le Tote will assume roughly $26.5-million in liabilities related to the stores’ loyalty program. The deal will also give Hudson’s Bay a 25-per-cent equity stake in Le Tote and two seats on the company’s board of directors.

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Lord & Taylor generated roughly $1.4-billion in sales last year, but the luxury retail chain was not profitable, recording a loss of $119-million. Le Tote plans to bring its subscription business, which charges customers a flat monthly fee to rent women’s fashion and accessories, into a traditional retail environment.

The deal, which is expected to close before the holiday season, comes in the middle of an effort to take Hudson’s Bay private. A group led by executive chairman Richard Baker has offered $1-billion, or $9.45 a share, for the department-store chain, but a group of minority shareholders have opposed the bid.

Just weeks ago, minority shareholder U.S. hedge-fund firm Land & Buildings Investment Management LLC called for Mr. Baker’s ouster should the bid fail, and accused him of being “unqualified and far too conflicted” to remain on the board. The dissident shareholder has argued that the bid undervalues the companies assets, including real estate holdings. A spokesperson for Land & Buildings declined to comment on Wednesday’s deal.

Mr. Baker bought Lord & Taylor in 2006 and Hudson’s Bay Co. in 2008, two years after U.S. businessman Jerry Zucker had taken the Canadian retailer private. In early 2012, HBC took over management of Lord & Taylor roughly 10 months before the company would go public again. At the time, HBC invested $427-million into paying down Lord & Taylor’s corporate debt.

HBC has been working to keep up with changing consumer habits and the growth of e-commerce, as well as challenges to the department-store sector.

In 2017, HBC announced it would sell Lord & Taylor’s flagship store in Manhattan to office-space sharing service WeWork for US$850-million. That transaction closed in February. Recently it struck a deal to lease the top floors of Vancouver and Toronto Hudson’s Bay stores to WeWork.

The acquisition announced Wednesday does not include Lord & Taylor’s owned real estate assets or leases, which will remain with HBC and its real estate joint venture, HBS Global Properties. HBC has agreed to pay roughly $77-million annually in rent on the Lord & Taylor stores for at least the first three years. Starting in two years, the companies have agreed to an option to “reassess” the properties, which could include HBC taking some locations back.

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Le Tote, which is still securing financing for the deal, said in a statement that it plans to offer employment to the “vast majority” of Lord & Taylor staff.

A number of online retailers have recently moved into bricks-and-mortar stores, including eye-wear brand Warby Parker, clothing company Indochino and mattress retailer Casper. Le Tote wants to let subscribers pick up and drop off their rental boxes in Lord & Taylor stores, as well as to try on merchandise and to buy complementary items such as cosmetics and underwear.

“Customers are not single-channel shoppers,” Le Tote founder and chief executive Rakesh Tondon said in an interview Wednesday.

​Lord & Taylor’s inventory includes more than 500 brands, he added. Le Tote plans to expand its rental service to cover men’s fashion and sees an opportunity with children’s clothing that parents may prefer to rent rather than buy, as children grow out of them quickly.

The Lord & Taylor name will remain on the stores, and the company hopes to expand to between 70 and 100 stores across the United States in the next three to five years. New locations will be much smaller: While the typical Lord & Taylor is around 120,000 square feet, the ideal size for newer shops will be between 10,000 to 25,000 square feet, Mr. Tondon said.

Shoppers are attracted to subscription and rental services for products because of their value, concerns about sustainability and the uniqueness of the business, Cowen and Co. analyst Oliver Chen wrote in a research note on Wednesday, estimating such models could grow by 20 per cent or more each year. The deal with Le Tote “will give HBC attractive exposure to new talent and capabilities,” he added.

HBC CEO Helena Foulkes said in a statement that the deal “creates a new model for Lord & Taylor,” and would allow her company to focus on its Hudson’s Bay and Saks brands.​ The company declined a request for further comment on the deal.

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