Hudson's Bay changes hands

MMR, August 11, 2008

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TORONTO -- For the second time within three years Hudson's Bay Co. (HBC) has a new owner. NRDC Equity Partners announced on July 16 that it had acquired the remaining 80% of the shares of Canada's historic retailer that it did not already own.

The purchase included all of "The Bay," traditional department stores; mass merchandiser, Zellers; the Home Outfitters chain; and Fields, the extreme-value western chain. Two years ago NRDC acquired Lord & Taylor and more recently, jewelry and home furnishings chain, Fortunoff.

The purchase price was not disclosed but was apparently modestly in excess of the $1.1 billion paid for the company in 2006 by Jerry Zucker, the South Carolina entrepreneur. The current sale was precipitated by the unexpected death of Zucker in February of this year.

Richard Baker, a third generation member of a successful Greenwich, Conn., real estate family, controls NRDC Equity Partners and acts as its chief executive officer. The purchase of Lord & Taylor in 2006 was apparently a real estate play. Since that time Baker seems to have developed a passion for retailing. As well as his recent successful purchases Baker made unsuccessful bids for companies as diverse as Toys 'R' Us and the Burlington Coat Factory.

The intention of the new owner is to create a new entity, Hudson's Bay Trading Co., which will be the parent of all the Canadian and U.S. retail units as well as the fashion design company, Creative Design Studios.

In interviews Baker has outlined his plans for the expansion and cross-fertilization of the divisions within the new corporate entity.

He recognizes that HBC's big stores (some as large as 900,000 square feet) in such major cities as Toronto, Montreal, Vancouver, Winnipeg and Calgary, are under utilized. He plans to devote space in them to Lord & Taylor, Zellers and possibly Fortunoff, as stores within a store.

Lord & Taylor and Fortunoff outlets may also be installed in some of the premises now occupied by Zellers and Home Outfitters in smaller communities. To help revive the fortunes of Zellers in its nose-to-nose struggle with Wal-Mart Stores Inc., Baker envisages introducing more leading brands and improving service levels.

The merchandising management functions of the HBC operating companies are currently integrated. Baker plans to reinstate distinct merchandise management teams for each division. "Separate leaders will worry 2417 about their core customers and satisfying those customers," he said. "In retailing you can't be all things to all people."

To head HBC's management teams Baker has appointed veteran U.S. retailer Jeffrey Sherman. Sherman's most recent responsibility was president and COO of Polo Retail Group for Ralph Lauren. Sherman had spent 29 years of his career with Bloomingdale's. Lately he was president and chif operating officer. He also had a two-year stint as CEO of The Limited Inc. fashion chain. One of Sherman's first tasks will be to designate leaders for the Bay and Zellers merchandising teams.

During his ownership of Lord & Taylor, Baker left the day-to-day operational management of the stores to retail professionals. He did, however, take a personal interest in the merchandise the stores carried. He was involved in establishing relationships with many of the 200 new, up-market vendors Lord & Taylor has added over the last two years. Baker and Sherman apparently intend to oversee a similar rejuvenation of the resource bases of the Bay and Zellers.

Canadian retail consultants are cautiously optimistic about the chances of success for a revitalized HBC.

The company has real strength in its real estate. The downtown locations are superb. A high proportion of the suburban locations occupy premises leased for long terms at very favorable rates in the 1980s and 1990s.

The department stores have been steadily losing market share for two decades. The fashion departments, in particular, have been undistinguished and have failed to capture their fair share of the young adult market. Zellers, though performing better than many expected against Wal-Mart, has also been losing share. But in the two years of the Zucker regime good progress has been made in upgrading the back office functions.