Federated's Logic in Shopping Lord & Taylor

New York — When Terry Lundgren said he was going to dump Lord & Taylor late last week — less than five months after it came along with Federated Dept. Stores' buyout of May Co. — it touched off muted speculation over what would become of the once-great nameplate.

But there's at least a modicum of credibility to a scenario suggesting a buyer will simply opt to continue operating the chain.

Some observers projected the once elegant, now simply staid department store chain — more than a few suggest it's little more than a legacy business — would be bought in whole or part by a private equity group, while others suggested Neiman-Marcus, Nordstrom or even Saks might go after it.

Still other scenarios centered on a partial real estate play, particularly involving the 55-store chain's Fifth Avenue flagship, in which the guessing centered on a trendy Manhattan residential conversion. Names like Apollo, Texas Pacific, Blackstone, Bain and others immediately were at the center of the speculation along these lines.

Lundgren, the Federated chairman, president and ceo, stated that L&T simply didn't “fit” with the FDS plan, in much the same way that Lord & Taylor had suggested years ago that home furnishings didn't fit with its business, as it mostly exited the category.

“After a thorough review, we have concluded that Lord & Taylor does not fit with our strategic focus for building Macy's and Bloomingdale's national brands,” Lundgren said. “However, Lord & Taylor is a niche specialty retailer with a great name, many outstanding locations, an experienced management team and a strong customer following that makes it a desirable business.”

It won't be competition for Federated's 950 doors, which is likely, in part, why Lundgren was so generous in his description. Macy's and Bloomingdale's have been papering the country with their names and the small L&T chain, producing just $1.6 billion in sales with stores in 11 states and the District of Columbia, can't be seen as serious competition.

First, the number of stores just doesn't pose a serious threat. And, second their relatively small size — averaging a bit over 100,000 square feet — is less than half the size of a typical Macy's.

A real estate play, the popular retail investment strategy of the last five years or so, doesn't seem particularly likely. First, there are only a few department store anchor-type stores left. Second, many malls where L&Ts currently are sited might be less than welcoming to a Target or Wal-Mart. There are a limited number of likely suspects to occupy such space.

Even the landmark Fifth Ave. store — 600,000 square feet — might not be best utilized in a residential conversion, suggested Rob Nager, executive managing director of MHP Retail Services. The neighborhood is awash in new residential properties that would suggest a growing base for a retailer, he said.

“There's a whole revival taking place in that neighborhood. I would hate to see L&T go because it has a very definite niche” in the local community,” Nager said in an interview. “You could leave the store and build on top of it. There must be air rights there — that would probably be the best use. There's a good mix of retail in the neighborhood.”

Federated said it would account for Lord & Taylor as a discontinued operation. It closed the $11 billion acquisition of May Co. last August and since that time, most of the May nameplates have been converted to Macy's while a much smaller number have come under the Bloomingdale's umbrella.