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Private Equity Firms Likely Buyers for Lord & Taylor, Parisian

It's that time of year again, when, following the success or failure of the critical holiday season, retailers evaluate their future strategies. That often leads to big changes and this year is no exception: Saks Inc. and Federated Department Stores Inc. both have decided to lighten their loads, putting the Parisian and Lord & Taylor chains, respectively, up for sale.

No potential suitors have been named yet, but analysts expect to see the private equity buyout trend continue. But can they do what retailers haven't been able to -- revitalize tired stores? After all, private equity firms don't have a sparkling track record in retail takeovers. For example, Sears, acquired by ESL Investments Inc.-controlled Kmart Holding Corp., saw its domestic same-store sales decline 11.9 percent during November and December. Kmart meanwhile, posted a 1 percent increase--below the industry's pace of 3.5 percent growth.

Kenneth Wong, president of Westfield America Inc. for one, recently questioned the long-term potential: "It's dangerous to have non-merchants heading up retail," Wong said at an Urban Land Institute meeting. "You have to have exciting reasons for consumers to visit."

Stan Eichelbaum, president of Marketing Developments Inc., a retail consulting firm, has similar concerns.

"It's a very scurrilous scenario for retailers to be left out of ownership," Eichelbaum says. "Retail is a business of passion. It needs the artist-slash-scientist running the organization."

Problem is, there seems to be a shortage of artist-slash-scientists, he says, suggesting the dearth of proven retail executives helped pave the way for private equity to move in.

"When Neiman Marcus was in trouble, they called on Allen Questrom. When Barney's was in trouble, they called on Allen Questrom. When Federated was in trouble they called on Allen Questrom. And when J.C. Penney was in trouble, they had to call on Allen Questrom," Eichelbaum says. "If that's not a sign of a shortfall of talent, what is?"

Analysts suggest that one possible outcome is that a private equity firm could acquire both chains and combine them into a single company.

"The transaction would be logical because Parisian and Lord & Taylor have similar positioning in the [higher-end] market," wrote Bear Stearns retail analyst Christine Augustine, in a note to investors. "They have little overlap in their respective store bases, but have good geographical adjacencies."

Private equity firms are likely buyers because they have plenty of cash, along with high hopes they can extract more value out of the chains. If all else fails, they can often make a tidy profit selling the real estate. After all, big retail companies have mostly been sellers, rather than buyers, in recent transactions. In just the past year alone, Sears, Toys 'R' Us and Shopko were purchased in whole or in part by private equity.

Neither the Saks nor the Federated announcements are big surprises. Saks has, in the past year, sold off the bulk of its northern and southern department store chains. It sold Proffitt's and McRae's to Belk Inc. for $623 million, and unloaded its northern department store group to Bon-Ton for $1.2 billion. The 40 Parisian stores posted $700 million in sales in 2005.

Saks is restructuring to focus on its main Saks Fifth Avenue store brand. It named Stephen I. Sadove, currently vice chairman and COO, as CEO, succeeding R. Brad Martin. Martin will remain chairman.

Similarly, since its acquisition of May Department Stores, Federated has focused the company's strategy on the Macy's and Bloomingdale's names, converting many of May's brands to Macy's. Lord & Taylor, ultimately, does not fit in with the strategy. The 55-store chain posted about $1.6 billion in sales in 2005. Analysts speculate the price tag could be about $1.1 to $1.4 billion. Officially, Federated says it is looking to sell the entire chain to one buyer, though some analysts speculate that the 10-story, 610,000-square-foot Manhattan flagship may be sold separately.

-- David Bodamer

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