Last month, department store conglomerate Hudson's Bay (NASDAQOTH:HBAYF) said that it was evaluating "strategic alternatives" for its Lord & Taylor brand. The company indicated that a sale or merger were two potential outcomes -- left unsaid was the possibility of an outright liquidation for the storied retailer.
In the meantime, Hudson's Bay is continuing to downsize the Lord & Taylor chain as part of a plan announced last year to close up to 10 of the 48 stores that it operated at the time. Last week, the company listed an additional pair of Lord & Taylor stores in struggling malls for closure later this year.
Lord & Taylor has lost its relevance
Lord & Taylor is the oldest department store chain in the U.S., having been founded in 1826, nearly two centuries ago. However, over the past two decades, it has bounced around between several corporate parents, causing the chain to fall into a state of neglect.
A little over a year ago, Hudson's Bay appointed a new president of Lord & Taylor, Vanessa LeFebvre. LeFebvre is emphasizing personalization as a key tool for revitalizing the brand. She believes that Lord & Taylor's relatively small size should enable it to be nimbler and better connected to the communities and customers it serves than rival department store chains.
However, sales have been plunging at Lord & Taylor for years. Even when many department stores returned to growth in 2018, Lord & Taylor continued to post sales declines. This suggests that the brand isn't bringing in new customers. While it might be possible to get existing patrons more engaged through personalization initiatives, winning new ones will be harder than ever in today's ultra-competitive retail environment. Making matters worse, a significant number of Lord & Taylor stores are in malls that no longer attract the brand's upper-middle-class target demographic.
Two more store closures on the way
Growing Lord & Taylor's customer base may prove to be an impossible task. By contrast, closing underperforming stores should be more straightforward.
Last year, Hudson's Bay said it would shutter up to 10 Lord & Taylor stores, but only three have closed so far. Lord & Taylor shut down its Manhattan flagship store in conjunction with selling the building for $850 million to an affiliate of WeWork. It also closed its store at Oakbrook Center near Chicago, where its lease was expiring, as well as its location at Monmouth Mall in New Jersey, a struggling property that is about to undergo an extensive redevelopment.
The next two stores to close will be at Lakeforest Mall in Gaithersburg, Maryland and Lakeside Mall in Sterling Heights, Michigan. These stores will liquidate their inventory over the next few months and close in September.
Late last year, I identified these locations as likely store-closure targets. Both malls are struggling with a variety of problems, including anchor store closures, rising vacancies, and -- in the case of Lakeforest Mall -- increased crime. As a result, local officials are entertaining plans for demolishing and redeveloping both malls. Clearly, neither one is an appropriate location for an upscale store today.
Is there anything worth saving?
Closing the Gaithersburg and Sterling Heights locations was a no-brainer due to the deteriorating state of those malls and the presence of other Lord & Taylor stores in the Washington, D.C. and Detroit metro areas. There are several other similarly situated stores that are candidates for being closed in the near future.
That said, management has to come to grips with a more fundamental question: Is it worthwhile to keep a scaled-down Lord & Taylor in business?
Many of the chain's stores are in excellent locations and likely produce decent financial results. Hudson's Bay has invested in renovations for several of these stores in recent years. With better management, perhaps they could produce higher profits.
However, since these locations occupy high-quality real estate, Hudson's Bay might get more value from selling or redeveloping those properties than from continuing to operate them. Considering the headwinds facing department stores, reviving Lord & Taylor's profitability to the point where the business would be worth more than its real estate simply may not be feasible.