As moderate-upscale department store chain Lord & Taylor struggles to stay relevant, parent company Hudson's Bay (HBC +0.00%) is continuing its efforts to trim the brand's store portfolio. On Monday, Hudson's Bay confirmed that the Lord & Taylor store at Oakbrook Center in the Chicago suburbs will close when its lease expires next January.
This is Lord & Taylor's third store closure announcement since the fall, which is a meaningful amount for a chain with just 50 stores. Barring a miraculous recovery, more store closures are likely in the future, benefiting rivals like Nordstrom (JWN +0.00%).
A money pit of unknown size
It's hard for investors to understand exactly how Lord & Taylor is doing. For bizarre reasons, management groups the Lord & Taylor business into a segment with the far more successful Hudson's Bay full-line stores, even though the latter operate in a different country (Canada). Thus, Hudson's Bay's solid results offset part of the weakness from Lord & Taylor.
Fortunately, it's possible to glean some hints about Lord & Taylor's performance by examining Hudson's Bay's financial reports in detail. For example, the chain appears to have suffered a double-digit comp sales decline in the third quarter of fiscal 2017. (Q4 results aren't available yet.)
The weak sales results are hardly surprising. Even the strongest department store companies are having trouble retaining their customers. Nordstrom's full-line business posted a 1.9% comp sales decline in the third quarter.
Nordstrom is outperforming Lord & Taylor, but it still faces challenges. Image source: Nordstrom.
It's even more difficult to get a handle on Lord & Taylor's profitability. But given that the parent company is losing hundreds of millions of dollars annually despite solid sales results for the Saks Fifth Avenue and Hudson's Bay chains, it's safe to say that Lord & Taylor is losing money.
The store closing process begins
Since mid-2017, Hudson's Bay has been under pressure from activist fund Land and Buildings Investment Management. Jonathan Litt of Land and Buildings wants the company to close and redevelop stores that aren't profitable enough to justify taking up valuable real estate.
Hudson's Bay hasn't endorsed this strategy, but it is slowly moving in this direction. Last fall, it sold the leases for stores in Annapolis, Maryland, and Skokie, Illinois, to a mall owner. Both stores will close in April. The company has also agreed to sell the Lord & Taylor flagship store in Manhattan for $850 million to make way for WeWork offices, although Lord & Taylor will maintain a significantly downsized store in the building.
The recent announcement about the Oakbrook Center store closing represents another step in the downsizing process. Oakbrook Center is one of the top malls in the country, with sales per square foot of nearly $1,000. Thus, this Lord & Taylor store ought to be quite profitable. It's possible that mall owner GGP is paying Hudson's Bay not to renew the lease so that it can bring in tenants that will pay higher rents and drive more traffic to the mall.
More changes ahead?
It's notable that all three malls where Lord & Taylor is planning store closures are also home to Nordstrom full-line stores. This seems to highlight Lord & Taylor's inability to compete effectively with other upscale retailers. By this time next year, Lord & Taylor will have closed two of its four Chicago-area stores, leaving Nordstrom with a dominant position in the region.
Hudson's Bay recently hired a new CEO, Helena Foulkes. She will have to decide whether it is feasible to fix the Lord & Taylor brand. However, Lord & Taylor has already squandered most of its brand equity. Given the challenging market for department stores as a whole, it will be tough to get customers excited about the chain again.
Instead, it might make sense for Hudson's Bay to consolidate its U.S. full-line store base under the higher-end Saks Fifth Avenue banner. Most Lord & Taylor stores are located in extremely affluent areas where Saks could potentially succeed. Other stores that don't make sense for the Saks Fifth Avenue brand could be sold.
A maneuver like this would allow Nordstrom to make further market share gains at Hudson's Bay's expense. However, it would likely give Hudson's Bay a more defensible market position in the U.S. going forward.
