The man who wants to fix retail

(Fortune Magazine) -- Moments before the lights dimmed for the Peter Som show this past February, the fashion world's heavy-hitters cut through the tents of New York City's Bryant Park to take their front-row seats. Som, an emerging designer, drew an A-list crowd of top executives from Saks Fifth Avenue and Bergdorf Goodman. Also perched in the front row was Richard Baker, an unassuming real estate developer with a baby face. Just two years ago Baker would have had difficulty landing a ticket, much less a prime seat at the event.

Although he has quickly been thrust center stage, Baker, 42, entered the fashion business by accident when his investment firm, NRDC Equity Partners (not the environmental group), spent $1.2 billion in June 2006 to buy Lord & Taylor, an aging East Coast chain in need of a facelift. His initial interest was in the underlying real estate value of the stores, but he soon caught the fashion bug. In quick succession Baker agreed to invest an additional $500 million over five years to revive Lord & Taylor, and then launched Creative Design Studios (CDS), an apparel manufacturer, to make clothes for the chain and possibly rival retailers. CDS spent $10 million for a 65% stake in Peter Som and signed deals with a grab bag of other designers.

Baker didn't stop there. The night before the Peter Som show, he was on the phone with his lawyers until midnight hammering out the final terms of his latest conquest: an acquisition of Fortunoff (a tired jewelry and home furnishings chain), which NRDC agreed to buy out of bankruptcy for $110 million. And as late-night TV pitchmen like to say, "Wait! There's more!" In October, NRDC raised $400 million for new acquisitions, and the firm is said to be eyeing Dillard's (DDS, Fortune 500) and Saks (SKS).

These bets have transformed Baker from an unknown to fashion's latest sugar daddy. But before he is genuinely welcomed into the club, he will need to show that he can make money, not just spend it. Very quickly he has had to learn new skills - choosing designers, rebuilding a client base, rebranding stores - all of which are foreign territory to someone who made his money building shopping centers anchored by Wal-Marts (WMT, Fortune 500). "My background is in business, but I also have a creative streak," Baker tells Fortune. "I'm not an artist, but I think about my work in a creative way." Which is his way of pointing out that he is not some deep-pocketed rube seduced by big-city glitterati.

What Baker lacks in Seventh Avenue pedigree he makes up for with a sophistication that isn't always apparent beneath his boyish charisma. ("Gee whiz" is a favorite phrase, along with other Wally Cleaver-isms, including "I don't want to stick a thumb in your eye, but...") The Bakers own a significant modern-art collection, and Richard's father, Robert, who founded the family real estate business and is one of four NRDC partners, is a trustee of the Guggenheim Museum.

In fact, the most tabloid thing about this child of privilege is that he travels from his home in Greenwich to meetings in a black Cadillac Escalade that he's pimped into a mobile office, complete with flatscreen TV, wireless Internet, fax, and printer. From the minute he drops off his three children at school in the morning, Baker shuttles from one appointment to the next, conducting business from its creamy leather seats. He is also a world-class connoisseur, equally at ease discussing Chateau Lafite or Jasper Johns.

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Unlike that of a typical collector, Baker's recent shopping spree is not just an attempt to amass trophy properties. He wants his design company to provide clothes for his department store, and his newly acquired jewelry-cum-home-furnishings business to become part of the mix. "We are not spending all this money just to sell clothes at Lord & Taylor," he says. "What I am talking about is a new paradigm for department stores."

Talk is easy; creating a "new paradigm" in a hidebound industry will be harder. More than a few would-be garment kings have lost their shirts (or at least their reputations) trying to restyle the rag trade. Witness the travails of Robert Campeau, whose 1988 buyout of Federated Department Stores resulted in bankruptcy. There was also R. Brad Martin, whose 1990s roll-up of regional chains, capped by the acquisition of Saks Fifth Avenue, was hailed as genius until it became apparent a decade later that the businesses added little value to one another. The latest whiz kid to stumble: financier Edward Lampert, whose reputation has been bruised in a so-far botched reinvention of Sears (SHLD, Fortune 500).

Baker's business plan has some big obstacles of its own to surmount He's committing capital to retail at a time the economy is faltering. While Lord & Taylor has undergone a more upscale repositioning, its sales per square foot hover at $290, less than the $350 to $400 of Bloomingdale's and Nordstrom (JWN, Fortune 500), according to industry sources.

Fortunoff, meanwhile, is reeling from an unfocused merchandise strategy and inadequate back-office systems. CDS, in addition to managing the egos of competing designers, is trying to create a profitable wholesale business from scratch when even established Seventh Avenue manufacturers are struggling. "Richard's got a tough road ahead," says Matthew Rubel, CEO of Collective Brands, which owns the Stride Rite and Payless shoe companies. "He's up against strong competitors and a difficult economy." Former Bloomingdale's CEO turned consultant Marvin Traub, who has talked to NRDC about teaming up on some projects, calls Baker an "original thinker with some fresh ideas," but adds, "He's got three major businesses that need to come together. The question is, Can it all work?"

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Soon after Baker bought Lord & Taylor, he took his three children - two sons and a daughter - to visit the stores. "I told them they could buy anything they wanted," Baker recalls. "They said they didn't want anything. Well, gee whiz, I didn't have to be a genius to figure out that was a problem." Soon new vendors were populating the children's department, including Scoop, Lilly Pulitzer, and Lacoste. Today his daughter buys her party dresses at the retailer. His sons wear navy-blue Lord & Taylor blazers to their private school.

Scouting stores on weekends is a routine from Baker's own childhood. "Instead of taking him to a baseball game, we'd get in the car and go look at shopping centers," says Baker's father, Robert. Baker's grandparents were also in the real estate game. His maternal grandfather, Loomis Grossman, bought and sold Manhattan properties, while his father's mother, Sylvia Garber, 98, developed residential and office space. "I'd sit at the breakfast table, and my grandfather would explain to me why I should never guarantee a loan," Baker says.

Despite that background, Baker initially had ambitions other than joining the family business. At age 15, while attending high school, he started a catering business called Party Perfect. From small dinner parties for friends' families, Baker worked up to serving dessert at a bar mitzvah for 100 people. "Richard doesn't perceive there are limitations to what he can accomplish," says Roger Hirschhorn, a childhood friend and partner in the catering enterprise. "Whatever the venture, he goes into it with the mindset that the sky's the limit."

After attending college at the Cornell School of Hotel Administration, Baker studied cooking in Paris and planned to open a restaurant in Philadelphia, but the deal fell through. Instead he went to work for his father at National Realty & Development Corp. Today National Realty owns 100 shopping centers comprising 20 million square feet, making it one of the largest privately held real estate development firms in the country. Back in the late 1980s, however, many of National Realty's tenants, companies such as Ames Department Stores, Caldor Corp., and Bradlees, all of which have since gone out of business, were struggling. Baker had heard about a fast-growing company called Wal-Mart Stores, which at the time had no stores in the Northeast. "Richard cold-called me, and then he shows up at our offices," says Michael Gardner, a regional vice president of real estate for Wal-Mart, who has worked for the company since 1989. "He didn't walk in here like he was representing his daddy's company. You could tell immediately that even though he came from great wealth, he had this desire to accomplish something on his own."

Over the next 15 years National Realty would develop 30 Wal-Mart stores along the East Coast. By 2004, though, creating new shopping centers was an uphill battle. Land was scarce and zoning requirements were strict: Saturation had set in. Baker was casting about for his next project when his father's longtime friend William Mack, the Apollo Real Estate Advisors founder, suggested they join forces. Along with another Apollo partner, Lee Neibart, the foursome formed NRDC Equity Partners, which made unsuccessful bids for Toys "R" Us, Burlington Coat Factory, and Pathmark before buying Lord & Taylor. "I told Richard that I thought he was crazy - that Lord & Taylor would be too big and too complicated for us," Baker's father says.

Baker persuaded his partners to take the plunge, and in so doing the group bested a field of more than 20 contenders, including the private equity firms Cerberus Capital Management and the Blackstone Group. The four partners put up $100 million of their own money and borrowed the rest. "There is no question that Richard is being aggressive," says Adam Ifshin, who works at a rival real estate development firm, DLC Management Corp., and has known Baker for years. "Is he right? I don't know. Is he smart enough to be right? Definitely."

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Considered the oldest U.S. department store, Lord & Taylor was a pioneer in many ways, becoming the first to install an elevator, the first to open a branch location, and the first to hire a woman CEO, Dorothy Shaver, who was instrumental in making it a beacon for American designers in the '40s and '50s. Lord & Taylor's troubles started in 1986, when parent Associated Dry Goods, which had owned the chain since the early 1900s, was acquired by the May Co. May piled the store with moderately priced merchandise and ran frequent sales. It also kept a tight rein on investments. "Under May, Lord & Taylor was starved of capital," Traub says.

When Jane Elfers was named CEO in 2000, she set about restoring Lord & Taylor's carriage trade heritage. To get younger shoppers back, Elfers dropped dusty brands - Liz Claiborne, Tommy Hilfiger, and Nautica - giving up $350 million worth of sales in the process. That helped her get trendier labels, including Coach, Tracy Reese, and Ted Baker into the store. Today 85% of the merchandise found in Lord & Taylor wasn't there three years ago. Another smart move: Elfers closed 32 underperforming stores in 2003. The remaining ones are in some of the East Coast's best malls.

Then came Federated's 2005 acquisition of the May Co., and Lord & Taylor's future was once again in doubt. When NRDC emerged as the store's new owner, Elfers, like everyone else, thought it was a real estate play. But, as Baker is fond of saying, "a funny thing happened on the way to the closing." Thanks to Elfers's hard work and the changing retail landscape, Lord & Taylor's business started to rebound. Profits and sales soared to their highest level in 15 years. The store, which has sales of $1.4 billion, also got a lucky break. Federated, now known as Macy's, closed or rebranded dozens of stores it had inherited from May, knocking out much of Lord & Taylor's competition in key cities. "We quickly realized that there was more to Lord & Taylor than we initially thought," Baker says.

Getting the company fully back on its feet would require money. Many of Lord & Taylor's stores hadn't been refurbished in more than a quarter-century, and they looked shabby compared with the competition - none more so than the New York flagship. Baker is currently awaiting city approval to downsize the 611,000-square-foot store by nearly half, add a boldface-name restaurant (Nobu is a possibility), and build either office space or luxury condos above. Some $60 million was spent in 2007 on new fitting rooms, fixtures, and carpeting at satellite suburban locations. More - ambitious plans are on the way, including a redevelopment of the Stamford, Conn., property to include a Whole Foods and parking garage. (NRDC needs to first overcome opposition from local residents and the zoning board.) The changes are starting to turn heads. "For a while, we weren't even looking at Lord & Taylor's sales when we analyzed a mall, because they had one foot in the grave," says Steven Greenberg of the Greenberg Group, which advises retailers on their real estate. "But over the past 12 months, their business has improved dramatically."

Seeing the potential in Lord & Taylor led Baker to a grander vision: What if he could fundamentally change the business model? Department stores had come to rely on in-house brands for a growing portion of sales and profits, but these "private-label goods," as they are called, tend to be of inferior quality to designer merchandise. A desire to raise the bar led Baker to launch CDS. The startup recruited Charles Nolan, who had created multimillion-dollar lines for Anne Klein before launching his own label; Joseph Abboud, the men's-wear designer known for his twist on the classics; Cynthia Steffe, who had recently sold her company; and Bryan Bradley, the creative juice behind the Tuleh fashion label.

CDS intends to make clothes for Lord & Taylor (the exception being Peter Som, whose creations are too high-end for the chain) and also for other retailers, thrusting it into wholesale manufacturing at a time established players such as Liz Claiborne and the Jones Apparel Group are stumbling. Selecting and managing fashion talent at CDS is proving a tricky business too. A line designed by Bryan Bradley has been discontinued, raising the question of whether the designers Baker has handpicked have enough commercial firepower. Bradley did not respond to phone and e-mail messages. Designer Cynthia Steffe has also parted ways with the company. An NRDC spokeswoman confirmed Steffe's departure but declined to elaborate. "I'm focused on other opportunities now," Steffe says.

Baker's latest acquisition - Fortunoff - is also something of a head-scratcher to fashion industry insiders. The chain, founded in 1922 by Max and Clara Fortunoff, has lost its reputation for high-quality goods at reasonable prices and is unable to compete with big-box rivals like Bed, Bath & Beyond and Target. In 2007 the company lost $36.6 million on sales of $464 million, according to the bankruptcy petition. Baker figures there is a simple fix. In addition to spending $100 million to renovate Fortunoff's existing 23 locations, he plans to open Fortunoff outposts in Lord & Taylor stores, solving two problems at once: The added volume will help stem Fortunoff's losses and give Lord & Taylor an additional brand name to generate foot traffic. "The great thing about Richard is that he's open to new ideas," says Collective Brands' Rubel, whose wife is a longtime friend of Baker's. "Many people in our industry take the attitude of 'Been there, done that.' Because Richard is an outsider, he examines things on their merits."

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At the end of most business days, the Escalade chauffeurs Baker far from the hubbub of Seventh Avenue (or from his office in Purchase, N.Y.) to his estate in Greenwich - one of three homes he owns; the others are in Telluride, Colo., and on the North Fork of Long Island. Located in Conyers Farm, a 1,500-acre tract of land straddling the Connecticut-Westchester border, the gated community boasts stables, polo grounds, and lots of famous residents, including the filmmaker Ron Howard and former New York Knick Allan Houston.

Once on Baker's ten-acre property, the Escalade hums along a curving drive and stops in front of the barn. About 100 yards from the house, the structure, which was reassembled from the stone and timbers of early-American barns, serves as the ultimate family room, a place for the kids to skateboard or for Richard and his wife, Lisa, to host parties.

The real surprise is what's hidden below. For all of the barn's rustic charm, once visitors descend a winding narrow staircase, they get a shock of the new. The focal point is a 50-foot pool designed by the installation artist James Turrell. The pool is rimmed with long fiber-optic strands of light that change color, based on a computer program, shifting the mood from ebullient to ethereal. This evening the soft blue of the lights combined with the sound of Buddhist monks chanting over the sound system creates an otherworldly atmosphere. The adjoining bathroom and gym, with treadmill and weights, make for a giant piece of livable art. Baker normally starts his day swimming laps in the pool or on the treadmill watching CNBC projected onto the far wall.

Outside the barn, in a tree near the tennis courts, sits a six-foot glowing, round object. Designed by Robert Whitman to resemble the moon, the sphere changes color and flashes images of the real moon's surface. The house itself, overlooking gardens and a second, outdoor swimming pool, is filled with sculptures, paintings, and the photography collected by Lisa, whom Baker met through a mutual friend soon after the two graduated from college. "For the Bakers, art is part of their everyday life," says Walter Smith, an architect formerly of Skidmore Owings & Merrill, who is now curator of Baker's latest project.

Called the Bakerie - a shorthand name for Baker International Exhibit - the fledgling museum has commissioned works from about two dozen artists. Some of the art will be showcased at NRDC properties. Some of it will be donated to museums, but the goal is for most to be displayed in an old town-hall building in Stamford that Baker is in discussions to lease.

Baker developed his appreciation for art as a child when his mother, Bettylou, who divorced his father in 1979 and died in 1998, took him to museums. But for a long time he didn't understand the significance of the pieces. "When I was about 32, a light bulb went off," he says. "I realized contemporary art was about thinking differently, and that if you think differently, you can be successful [in business]."

Whether Baker's different approach to fashion generates the same wattage is an open question. Lord & Taylor is a far more exciting place to shop than it was five years ago. But customers are fickle and competition stiff. In fashion all the right moves are not always enough. That is especially true for regional players, which will find it tougher to compete in a world dominated by national chains. There is one aspect of the deal, however, that Baker can claim as a victory. Real estate executives currently value Lord & Taylor's property, including the 22 stores it owns and the 20 for which it has ground leases, at upward of $1.7 billion - some $500 million more than NRDC paid for the company. Of course, realizing that value will depend on whether Lord & Taylor can once again become a must-shop destination. For that to happen, the dealmaker-turned-fashionista is prepared to wait beyond the next few seasons. "In real estate," he says, "you hold a property for 40 years. In retail they want to know, How are sales today?"

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