In late August, Le Tote, a seven-year-old clothing rental startup, acquired Lord & Taylor, a middle-market department store founded almost 200 years ago. Le Tote paid $100 million in cash for Lord & Taylor’s brand name and inventory; it also assumed control of its 33 retail stores and its website. Hudson’s Bay, Lord & Taylor’s former parent company, will retain control of the real estate for the 33 stores and will pay rent on behalf of Le Tote for three years. 

Le Tote said there were three main reasons behind the transaction: 

  • SKU breadth and depth: It can now add millions of SKUs of Lord & Taylor’s inventory to its rental assortment, which it claims will make it “the most robust inventory offering of any rental service or any subscription service out there.”
  • Technology and the customer experience: Le Tote says it will be able to integrate its technology into the Lord & Taylor in-store experience, which might include familiar yet unproven “future of retail” initiatives around increased data for sales associates and technology in fitting rooms. It hopes these will drive increased personalization and therefore sales. 
  • Retail depth: The 33 stores Le Tote will keep in operation give it a real retail footprint that it says would have taken at least four to five years to build on its own. 

SKU breadth and depth

When we surveyed the state of the rental industry around the time the deal was announced, Rent the Runway led the pack with the broadest assortment, boasting over 600 brands and 20,000 styles, with hundreds being added weekly. Le Tote had only 150 brands and thousands of styles, far behind Rent the Runway. Le Tote’s claim that the acquisition allows it to add millions of pieces of inventory to its selection includes both depth and breadth. Lord and Taylor lists 372 brands on its website, and likely more in stores. Even if one assumes no overlap between Lord & Taylor and Le Tote’s assortment (there is definitely overlap), the combined company likely remains a close second to Rent the Runway. 

When it comes to depth, however, it’s logical that Lord & Taylor has more inventory than Rent the Runway does given it has five times the amount of revenue, which requires more product to sell. The issue, though, is that this is not always a good thing. Lord & Taylor is a classic over-buying department store that brings in too much inventory and then has to mark it down endlessly to get rid of it. This is nowLe Tote’s problem. It likely does not need this much inventory to operate and scale, which risks being a burden on its system, customers and working capital. 

While buying Lord & Taylor allows Le Tote to access this inventory and assortment faster than it could have if it built it itself, it might have been better off somewhere in the middle, making a big inventory investment but being selective about what brands it brings in and how deep it buys into them. For a department store with $1 billion in sales, compared to Le Tote’s estimated $100 million, too much inventory could be crippling. 

Technology and the customer experience 

There is no end to proclamations that technology will “revolutionize” the customer experience in physical retail. The reality is that most bad shopping experiences are the result of poorly trained people, not because of a lack of technology. Retail has and always will require a human-to-human interaction and there is no substitute for it. 

Given this, it would make more sense to use this line of inquiry if Lord & Taylor was buying Le Tote, as it would want to talk up its technology prowess to an acquirer. But because it’s the other way around, there is less reason to believe that this technology will really make a dent in Lord & Taylor’s struggling business. Sure, more data can help, but without a superior in-store experience, none of it can be put to use. 

The opportunity to introduce more diverse business models to Lord & Taylor’s customer base beyond just buying clothing is interesting—Le Tote has discussed multiple types of subscription offerings—but this could be achieved via a close-knit partnership versus an acquisition.  

Retail depth

Lord & Taylor’s 33 stores were the third reason Le Tote was interested in the transaction, with the hope that the department store’s existing footprint would allow it to leapfrog the process of building out this retail fleet itself. Again, the theory at a high-level makes sense, especially given the low price of the deal. 

However, there are two main issues. First, Lord & Taylor stores are massive, often clocking in at 100,000 square feet. Stores this size offer too much space for a modern retail experience, and it forces the company to fill all of this space with inventory, compounding the over-buying problem even further. Rent the Runway, which has opened five stores so far, uses less than 5,000 square feet per store since its inventory is centralized in two warehouses and the physical stores are mostly showrooms and drop-off locations. It’s hard to imagine what Le Tote needs all of that space for. Even if it wanted to fulfill out of these stores, that introduces a considerable amount of complexity, especially since Rent the Runway has had issues operating just one warehouse this year. 

Second, Lord & Taylor’s former parent company is covering the rent payments at the 33 stores for the next three years. This is nice, but it creates a steep cliff where, after that amount of time, Le Tote will have to assume all of those costs, especially for stores that are way bigger than it needs. While the three year honeymoon period gives it a good amount of time to get its house in order, it’s also an unrealistic simulation for what the business can actually afford, which might come back to haunt it. Working with what a company has and can pay for allows it to make the right decisions. Hudson’s Bay is somewhat acting like a VC that subsidizes a company for a number of years, so that it can focus on growth over profits. Then, all of a sudden, it needs to be profitable, and the path to get there is not always clear. Actual reality is better to work in than distorted reality. 

Going Forward

While there are plenty of risks to this deal, there is also upside. If Le Tote can handle all of the looming challenges outlined above, it could have a bargain deal, buying a company for one- tenth of its revenue. Even so, Lord & Taylor has lost $400 million in revenue over the last decade, a slide that likely will continue. With a recession on the horizon, there is also macroeconomic risk for Le Tote, as it will be making these investments and trying to do a turnaround as consumer spending is softening. 

 

But with Rent the Runway having a terrible 2019 because of scaling issues, it’s hard to imagine how Le Tote, which is about half its size revenue-wise, will be able to keep growing without falling prey to the issues Rent the Runway did, while also turning around Lord & Taylor. That is simply a lot to do in a short amount of time.   Perhaps the best part of the deal was Hudson’s Bay getting a 25% stake in Le Tote along with two board seats. It can watch from the sidelines to see if all of this work and complexity pays off or if it simply relies on too much going right. In the quest for scale, some things can be accelerated, but building a fundamentally sound business always takes time.