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FAMOUS NAMES, UNCERTAIN FUTURES

Will the new owners of Lord & Taylor and Printemps revive the struggling department store chains or sell their real estate?

By Curt Hazlett

Between the two of them, Lord & Taylor and France’s Printemps have 321 years of retailing experience. But when each announced prospective new owners in June, industry watchers wondered if the two old names were nearing the end of the line as department store chains.

The 48-store Lord & Taylor was bought for a lofty $1.2 billion, not by a retailer but by NRDC Equity Partners, a venture of National Realty & Development Corp. and Apollo Real Estate Advisors. Printemps, a fixture in Gallic retailing since 1865 with its landmark Paris store and 17 others in smaller cities, was acquired for $1.35 billion by a joint venture of Deutsche Bank’s RREEF real estate investment management unit and Maurizio Borletti, the chairman of the Italian department store chain Rinascente.

Both buyers voiced commitments to retailing. Noting that Lord & Taylor “has been an iconic national brand for 180 years,” NRDC President Richard Baker said the partners “believe there is significant opportunity to continue the revitalization of the brand.” Borletti, meanwhile, told reporters that his team would invest heavily in Printemps in an effort to attract more affluent customers.

But both chains are facing some hard facts. Lord & Taylor, currently owned by Federated Department Stores, struggled with lackluster sales for years under The May Co., which closed 32 of the chain’s 55 stores in 2003. Across the Atlantic, Printemps — owned by PPR, which also owns Gucci Group — saw a 4.1 percent drop in sales in 2005 even as sales jumped at other high-end retailers.

Perhaps the hardest fact facing both retailers is that their value lies mostly in the real estate they own, not in their brands. Lord & Taylor’s gem is its 611,000-square-foot flagship on Fifth Avenue in Manhattan, whose value is variously estimated at between $300 million and $600 million. Its other stores — in 12 states and the District of Columbia — are in such prime centers as Chicago’s Water Tower Place. The flagship Printemps store is on Boulevard Haussmann in Paris, near other retail powerhouses such as Galeries Lafayette. The remainder are in the centers of cities throughout France, many of which are experiencing soaring real estate values.

Neither deal has yet been completed. The Lord & Taylor sale closes in the third quarter, while the Printemps sale must be approved by regulators and the retailer’s unions. In the case of Lord & Taylor, observers say the new owners will likely take their time in deciding next steps. After the deal was announced, NRDC Equity Partners said the chain’s real estate portfolio would be reviewed, but said no decisions had yet been made on individual stores. They said the primary goal is to make a go of the brand. “The strategy has got to be one of looking at the business model and ascertaining if they can bring Lord & Taylor back to the cachet of its heyday, which was a better department store mix with more upscale clientele,” said Stuart Kessler, a veteran retailer who now is president of Clear Thinking Group, a consulting firm based in Hillsborough, N.J. Whether that will succeed “clearly remains to be seen,” he said.

The first questions Kessler believes will be addressed have to do with the number and sizes of stores: “What’s the right size box for the concept? How many of the stores fit into that mode? What’s the right environment to have them in? What malls make the most sense relative to demographics, and how many could they open in?”

Although he conceded that the real estate is a big driver in the transaction, Kessler said he wouldn’t dismiss the chances of reinvigorating the Lord & Taylor brand. “They did this because it’s an opportunity to own a business that, if it’s brought back to its glory days, would throw off a lot of cash,” he said. “On the upside they’ve got the opportunity to generate substantial cash flow, while on the downside they have a good portfolio of stores.”

Others take a more pessimistic view of Lord & Taylor’s survival. “No one believes Lord & Taylor means anything anymore in the marketplace. It’s not a viable competitor. It’s no longer a player,” said Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm based in New York.

“There was a remerchandising effort by the current president, and she did make progress,” Davidowitz said, referring to Lord & Taylor CEO Jane Elfers. “The assortments are younger and more focused, but it’s not enough. Lord & Taylor was made for the economy of the last five years. They were in a perfect position to capitalize on the luxury trend, and they did nothing. What that tells you is they’re gone.”

Davidowitz believes the new owners will take their time in deciding how to liquidate the retailer. “They’ve said it’s going to be business as usual, but they had no choice but to say that. They don’t want everybody to quit. They have to incentivize and motivate the team,” he said. “If you want to enhance your returns, you need time. Anything done in haste will destroy you, and if you want an example of that look at the terrible prices Winn-Dixie got for its stores.”

Davidowitz offered another reason why Lord & Taylor’s fate will unfold slowly. “A lot of the stores were built by developers, and they have a huge say in what happens to them. A number of developers will want to take property back and redevelop it,” he said. “This is going to take a long time.”

Printemps’ buyers have been more explicit in their plans for the retailer. Borletti, the Rinascente chairman, told the International Herald Tribune that his goal is to increase profitability by shifting more toward the luxury segment, expanding hours and cutting costs. Part of his plan is to spend more than $350 million over the next five years to make the stores more upscale.

But even with such efforts, Printemps faces big challenges, said Michel Choukroun, a retail analysis consultant and a professor at the University of Paris. Choukroun noted that department stores hold just 2 percent of the retail market in France. “We have big department stores in Paris, of course, and they work well. But in a lot of smaller cities, their situation is more critical,” he said. “In Paris, they can focus on luxury. I’m not sure we have the same target in other cities in France.”

Choukroun believes Printemps will need to create a new approach in those stores. “They have to create a new format and not call them department stores,” he said. Noting the successes of hypermarkets and big specialty retailers in France, he said Printemps could aim for a format “that’s something new, between hypermarkets and luxury. A new format can work, but they have to invent it.”

And if no success can be found in the smaller cities? “The Printemps buildings are all in the city centers, so they have real value in terms of real estate. In France, there are big programs that have been launched in many cities to refurbish them and reorganize commerce. It would be no problem to find developers who would buy them but not stay with the department store.”