Canada’s oldest retailer is selling one of its banners to a clothing rental subscription service while maintaining an equity stake in the new business that the CEO says will be “a first in the industry.”
Hudson’s Bay Co. will receive $99.5 million in cash from Le Tote for its Lord and Taylor banner when the deal closes, the company said Wednesday, and a secured promissory note for $33.4 million payable in cash after two years.
HBC will also receive an equity stake in Le Tote, two seats on the company’s board of directors and certain rights as a minority shareholder.
The deal, which is expected to close before the start of this year’s holiday season and comes following a strategic review for alternatives for the banner, marks an exciting new phase for both businesses, said Helena Foulkes, HBC’s CEO, in a post on LinkedIn.
HBC declined an interview request, saying the CEO was unavailable.
San Francisco-based Le Tote offers monthly subscriptions for boxes containing several piece of clothing and accessories. Customers can browse online and choose the items they want to rent. The private company, founded in 2012, has raised more than US$75 million in venture capital, according to its LinkedIn page, and partners with hundreds of brands, such as Nike and Calvin Klein. It has more than 200 employees.
Lord and Taylor, meanwhile, sells clothing for men, women and kids, as well as accessories and beauty products online and in stores. It also offers a selection of home products, including bedding and home decor.
“Together, these companies will become a new distinct player in the U.S. market’s ‘middle ground,’ the segment of our industry that appeals to a wide array of customers seeking quality, style and service, outside of the off-price or luxury segments,” said Foulkes.
The companies will combine data-driven rental subscriptions, online shopping and bricks-and-mortar locations to create a modern service model, she said, calling it “a first in the industry.”
HBC’s stake in Le Tote will give it “a meaningful position to share in the success of this new company,” but also enable the retailer to focus on its greatest opportunities: Saks Fifth Avenue and Hudson’s Bay.
Le Tote management expressed excitement at the enhanced experience the deal will bring customers. Its website told customers to “get excited for more brands, styles and 1,000s of options” thanks to the acquisition.
“With this acquisition, we continue our journey in creating the future of retail,” said Rakesh Tondon, Le Tote’s chief executive and founder, in a statement.
Le Tote will acquire the Lord and Taylor brand and related intellectual property and assume operations of 38 stores, its digital channels and the associated inventory. It expects to extend employment offers to the vast majority of Lord and Taylor’s associates.
HBC and HBS Global Properties, HBC’s real estate joint venture, will retain ownership of all owned and ground-leased real estate assets related to Lord and Taylor.
However, for at least the initial three years, HBC has agreed to maintain responsibility for the rent owed by Lord and Taylor at the locations operated by Le Tote. HBC expects to be liable for approximately $77 million in Lord and Taylor total cash rent on an annual basis.
The deal to sell the banner comes as a group led by HBC chairman Richard Baker looks to buy the entire company and take it private.
The Baker group has offered $9.45 per share for HBC, however an initial analysis by the company has suggested the offer is “inadequate.”
The privatization deal also faces opposition from Catalyst Capital Group Inc., which recently acquired a roughly 10 per cent stake in HBC, and activist investor Land and Buildings Investment Management LLC.
A spokesperson for the shareholder group seeking privatization declined to comment, as did Land and Buildings.
HBC has struggled in recent years with disappointing results. In February, the retailer announced that its Canadian retail banner, Home Outfitters, would be discontinued and its 37 locations will be closed this year. The retailer also about 20 Saks Off Fifth locations will be closed in the United States.
HBC shares were up eight cents, or 0.79 per cent, at $10.24 in late afternoon trading on the Toronto Stock Exchange after reaching a high of $10.40 earlier in the day.
Companies in this story: (TSX:HBC)
Aleksandra Sagan, The Canadian Press