What does a department store and a shared work space company have in common?
It sounds like the beginning of a joke. But it's not. One industry has too much real estate, and another needs more. That's the basic concept that brought Lord & Taylor and WeWork together.
On Tuesday, Lord & Taylor's parent company, Hudson's Bay, announced a deal to sell its flagship New York City Fifth Avenue store to WeWork for $850 million. WeWork will convert most of the building to be its headquarters, on the top floors, while Lord & Taylor will lease space to operate a significantly scaled-down department store — from 10 of 11 floors to three floors over 150,000 square feet.
"We've announced a deal for four locations, Fifth Avenue Lord & Taylor building, Toronto, Vancouver and Frankfurt in order to put WeWork in the top portion of these buildings, and drive those young, millennial WeWork members through our retail stores for them to have beautiful office space — with high ceilings and big windows — and it's a real win-win." Hudson's Bay Executive Chairman Richard Baker told CNBC in an exclusive TV interview from the WWD CEO Summit in New York City.
The department store company has been under pressure from activist investor Land & Buildings to take action to unlock the value of its real estate. While Baker wouldn't tie the WeWork deal to that activist pressure, he pointed to a needed cash infusion to go toward paying down burdensome debt as the greatest benefit.
"Most important, perhaps, is what this does for HBC's financial condition," Baker said. "This drives in a tremendous amount of cash and allows us to pay down $1.6 billion in debt, and leaves us at the end of the transactions with approximately $385 million in cash. This sets us up to be really strong financially going forward, as we execute what's really a difficult retail environment."
The future of department stores remains a big question in retail as consumers move away from malls and the traditional format in favor of online shopping and a variety of other retail options. The changes in the sector are leading a number of department stores to undergo various levels of transformation.
Macy's is working on a number of new strategies under new CEO Jeff Gennette. The Nordstrom family members have been forthcoming about their desire to take the department store private. CNBC has reported that Baker has explored taking Hudson's Bay private, as well. Baker's private equity company, NRDC Equity Partners, bought Hudson's Bay in 2008 and took it public in 2012.
When asked whether the lower debt will help to take Hudson's Bay private, Baker said, "We're positioning ourselves to win, and that's what this is all about."
Baker also didn't deny outright a report from The Wall Street Journal, which wrote last week that Lord & Taylor was near a deal to add its brand to Wal-Mart's website.
"I think you should keep an eye on Lord & Taylor, because the future of Lord & Taylor may be brighter than people think," the executive told CNBC.
Lord & Taylor has only 49 physical locations, and Baker is known for his real estate expertise.
"With what's going on online, Lord & Taylor has a breakout opportunity to be a huge, major player online with a very small number of brick-and-mortar stores," he said. "I bet, if you sat down with the folks from J.C. Penney, Macy's or Nordstrom, they'd be really thrilled if they had a much smaller footprint of brick-and-mortar stores and high-quality locations than having a huge number of stores and locations that are not all good."
Baker is taking over as interim CEO of Hudson's Bay after the retailer announced late Friday afternoon that Jerry Storch would resign from the position after only two years with the company. Hudson's Bay didn't offer much of an explanation for the departure, although Baker praised Storch in the announcement Friday as well as in his interview with CNBC.
"Jerry did a spectacular job for us, and it was just time for him to go back to his Storch Advisors and time for us to look for different opportunities," Baker said.
Turning his attention to the holiday season, Baker said he is "very cautious and conservative going forward," adding that he wants his stores to have exclusive products while admitting that the company needs to better utilize the data it has.
"It was a tough Christmas last year, but we run our business in a very conservative way, and if it's better than that, it's a win for us," the executive said.