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Department stores are having a rotten time. But a recent deal shows that if done right, they can be profitable businesses.
Private equity firm Bluegem has sold Liberty, the landmark London department store, for around £300M. That is almost 10 times more than the £32M it paid for the business in 2010. The buyer is another private equity firm, Glendower Capital.
When Bluegem bought the store, it produced revenue of £63M but zero earnings before interest, tax, depreciation and amortisation. Last year revenue was £166M and EBITDA was £25M.
The turnaround was a triumph of the concepts of destination and experiential retail. Bluegem revived Liberty’s heritage of selling fabric prints with unique designs, and put a traditional but hip men’s barbershop in the basement, among other innovations.
The location helped also. Liberty occupies an 80K SF, six-storey, mock-Tudor building just off Regent Street, and has benefitted from the improvement in footfall that street has experienced in the past decade.
The profit Bluegem has made was helped by the fact that it bought the company from a forced seller at the bottom of the market, one that did not have a history of running department stores. The seller, listed company MWB, ran a serviced office and hotel business as well as Liberty, and was forced to sell its assets to repay debt.
The building itself is owned by German property company Sirosa, and it also picked it up on the cheap from MWB. Sirosa paid £42M for the building’s freehold, a 4.8% yield. Liberty rents the store on a 30-year lease, paying £2.1M in rent initially with five yearly rent reviews.
As London property values have increased, especially for long-leased assets, the value of the store is likely to have risen sharply. West End retail yields are now closer to 3%.
Liberty’s turnaround, along with that of chains like Italy's Rinascente, show that original, well-managed department stores still have a place in retail.
The challenge is for large chains like Debenhams and House of Fraser in the UK or J.C. Penney in the U.S. to mirror the unique offering they provide.
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