Greenwich

SCARSDALE, N.Y.

RICHARD A. BAKER dashes through the Lord & Taylor store here like Willy Wonka on a chocolate high.

Look at these sweaters!

Check out this Ralph Lauren!

Just wait till you see our store in Yonkers!

He squeaks to a stop at a table stacked with derrière enhancers. “How is this doing, Charlie?” he asks the store manager.

Then he surveys his domain: “This building alone could be a $100 million property!”

If Mr. Baker sounds like a rich kid playing with his new toys, well, that’s because he is a rich kid playing with his new toys. Only the toys happen to be two of the oldest department store chains in North America: Lord & Taylor, the grande dame that used to anchor the Ladies’ Mile in Manhattan, and the Hudson’s Bay Company of Canada, which traces its roots back to the 17th-century fur trade.

How Mr. Baker, 45, came to own these baubles is a story for our financial times. He’s not exactly a self-made man. His father, Robert C. Baker, owns a giant shopping mall development company. But in 2006, just before the recession, the younger Mr. Baker took a flier and bought Lord & Taylor, and later the Hudson’s Bay Company, putting down almost no money and borrowing more than $1 billion to finance the deals. Just about everyone in retailing wrote him off. Many whispered that he would get hammered, like several investment hotshots who set their sights on this business.

But a funny thing happened on the way to the comeuppance. It turns out that Mr. Baker wasn’t so bad at running department stores. In 2010, sales at Lord & Taylor’s 46 stores rose 12.2 percent from the previous year, and are now higher than they were before the recession bit. And Hudson Bay’s flagship Bay stores posted their first increase in same-store sales in a decade. Earnings at the combined companies totaled $450 million last year, before taxes, up from $330 million in 2009.

In January, Mr. Baker solved the company’s debt problem, striking a complex deal to sell the rights to leases on an underperforming division of the Hudson’s Bay Company to Target for about $1.8 billion. There are discussions about an initial public offering of the combined companies as soon as this fall.

“Richard shocked everybody,” says Matthew E. Rubel, the chief executive of Collective Brands, which runs businesses like Payless ShoeSource.

REMEMBER that kid in high school who was always hawking T-shirts or trading baseball cards, rather than hitting the books? That kid was Richard Baker. He grew up in moneyed Greenwich, Conn., where he still lives. His high-school shtick was running his own high-end catering business. At 15, after taking courses at La Varenne , the Paris cooking school, he employed his private-school classmates as waiters and was hired for parties around Greenwich.

“He was more interested in business than in being the captain of the basketball team,” his father recalls. “He was making money for the sake of making money.”

His parents divorced when he was 12, and he spent most of his weekends with his father, visiting potential strip-mall sites. The Bakers grew up comfortably; they now live very comfortably. Richard Baker declined to show reporters his Greenwich house — he does not want a “Richard Baker’s palatial estate” article, he says, and one swimming pool is under renovation — but the 10-acre property features loads of conceptual art that he and his wife, Lisa, commissioned, including a James Turrell pool .

He also has houses in Telluride, Colo., and on the North Fork of Long Island.

His father’s lifestyle provides a glimpse of how Baker fils lives. In addition to houses in Greenwich and in Palm Beach, Fla., the elder Mr. Baker, 76, owns a floor-through apartment on Fifth Avenue and 63rd Street, looking out onto the Central Park Zoo. His view is of swimming sea lions, lolling polar bears and the exhibit housing a king penguin named Robert . (Richard and other family members, who had donated to the zoo, had him named in his father’s honor.) A Degas and a Motherwell hang in his living room, and he owns Dublin, a thoroughbred that was in the Kentucky Derby in 2010.

He recruited his son into the family business after Richard graduated from the school of hotel management at Cornell. Richard had wanted to build a chain of chicken-wing restaurants, but his father talked him out of it during a walk along the beach near his summer rental in Quogue on Long Island.

“I said, ‘You know, in a chicken-wing restaurant, you’ve got to be up early in the morning, you’ve got to work late at night,’ ” Robert Baker recalls. “ ‘Maybe you should see if the real estate business is for you.’ ”

Richard agreed — and soon, working for his father, came up with the idea of courting Wal-Mart to lease space at their malls; until then, the chain had not opened stores on the East Coast. His father remembers flying to the retailer’s famously spare headquarters in Bentonville, Ark. “We were in this room for three hours, sitting, without anyone offering coffee or water,” he recalls. Finally, some lower-level executives came in, he adds, but little was accomplished.

Richard stayed with it, and Wal-Mart eventually did its first East Coast deal with the Bakers’ company, the National Realty & Development Corporation , opening a store in Canandaigua, N.Y. Though Kmart would offer a dollar a foot more for a space, Robert Baker says, his son preferred Wal-Mart, believing that it had better growth prospects. Today, Wal-Mart has 35 stores in Baker-developed malls.

BUT by 2005, after working for his father for nearly two decades, Richard Baker grew restless. As a friend puts it, “He didn’t want to spend the rest of his life renewing Wal-Mart leases.”

The real money, by then, was in another kind of deal. Banks were heavy with cash and were lending billions to Wall Street investors to acquire giant companies. It was, as the dealmaker Henry Kravis would later call it, “the golden age of private equity.”

In real estate private equity circles, retail companies became the hot investment, as their property holdings often made them worth more than their balance sheets suggested.

Mr. Baker became intrigued by a transaction known on jargon-happy Wall Street as an “opco propco” deal. In this structure, a retailer that owned its stores would be split into a retail operating company (opco) and a property company (propco). This way, a buyer of a chain could borrow more money to finance the acquisition by using the real estate as security, instead of just using the company’s cash flow for collateral.

Banks were eager to finance property deals, thanks to a white-hot market in commercial mortgage-backed securities — pools of bank loans backed by real estate from hotels, offices and stores that are then sold to investors and removed from bank balance sheets.

It may have been a bubble — “you could have taken over a whole country using C.M.B.S. in those days,” says a senior real estate executive who has done business with Mr. Baker — but it was one that Mr. Baker wanted to ride.

Over bagels and Nova at the Rye Ridge Deli in Stamford, Conn., Mr. Baker pitched Lee S. Neibart, a friend of his father’s and a prominent New York real estate investor: Why not set up a private equity shop to do these deals?

With Richard Baker as chief executive, the Bakers, Mr. Neibart and Mr. Neibart’s business partner Bill Mack formed NRDC Equity Partners , a private equity firm aimed at retailers.

Their first deal was a dud. After losing out to a consortium of real estate and private equity investors on Toys “R” Us in 2005, Mr. Baker and his partners invested $25 million alongside Apollo Global Management , the private equity firm, in its $5.1 billion purchase of Linens ’n Things. They lost their entire investment when the company, a housewares retailer, collapsed three years later.

Richard Baker says the fiasco taught him a lesson. “Where I failed was that if I’m going to invest in a transaction, I need to control it,” he says.

In 2006, Mr. Baker suspected that Federated Department Stores, which had just acquired May Department Stores, would put May’s tired Lord & Taylor chain on the block. Before Federated even asked for bids, Mr. Baker kicked the tires and lined up financing, letting him close the deal before other parties had completed their bids.

To pay for Lord & Taylor, which cost $1.2 billion, Mr. Baker and his partners invested just $25 million of their own money and borrowed the rest against the chain’s real estate, including the Manhattan flagship on Fifth Avenue at 38th Street. The deal was financed with more than $1 billion in C.M.B.S. loans from — ah, 2006 — Bear Stearns and Lehman Brothers.

“We paid a full price for it, but the real estate was sufficient to bail us out as a backstop,” Mr. Neibart says.

The Hudson’s Bay Company, one of the oldest companies in North America, would be the next target. Its crown jewel was the Bay chain, with about 90 locations. “Richard knew that there were at least 10 department stores in the United States that filled the market that the Bay could fill alone in Canada,” says Bonnie Brooks, who Mr. Baker appointed as C.E.O. of the Bay division in 2008.

Canada has Sears at the bottom of the department store market and Holt Renfrew at the top, Ms. Brooks says. “The only store between Sears and Holt is really the Bay,” she says. “And in America, in that same zone, you have everyone from Saks to Lord & Taylor to Macy’s, Dillard’s, Bloomingdale’s.”

And there was the Hudson’s Bay Company real estate. The chain owns many of its stores, including the Bay flagships in Montreal, Toronto and Vancouver.

Mr. Baker also found the company an alluring target because he thought United States chains would want to expand northward. In Canada, new builders go through a long government approval process; the simplest way to enter the market is through acquisitions.

He picked up the phone and cold-called Jerry Zucker , a billionaire businessman in South Carolina who had acquired Hudson’s Bay in late 2006. Mr. Baker offered to buy 20 percent of it. The deal was made in early 2007, for $100 million, with just $10 million cash down. His father was not thrilled.

“He overpaid for the 20 percent that we bought, and we did not have sufficient protection,” Robert Baker says.

About a year later, Richard Baker received a call from Mr. Zucker, who told him he had brain cancer and would be dead within three months. Would Mr. Baker like to buy the rest of the company? It would be their last conversation. Mr. Zucker died three weeks later.

The Bakers’ group negotiated the deal with Mr. Zucker’s estate, offering $1.3 billion for the Hudson’s Bay Company — but it didn’t have to open its own wallets. Of that amount, about $1 billion was debt. The remaining $300 million was covered by a sovereign wealth fund in Abu Dhabi — a longtime investor with Mr. Mack and Mr. Neibart — that invested $500 million cash. (The leftovers went to pay down some debt.)

Mr. Baker formed a holding company, the Hudson’s Bay Trading Company, that owned Lord & Taylor, the Bay stores and Canadian units like Zellers department stores. The Middle East investors owned just under half of it.

He hired new executives and began to trumpet turnaround plans. It was July 2008, three months before the collapse of the financial markets.

BRENDAN HOFFMAN has the broad shoulders and the wide, friendly face of a high school football player. He is 42 but looks no older than his late 20s. In 2008, he was heading Neiman Marcus’s catalog and online sales division when Richard Baker called. How would he like to bring his luxury contacts to Lord & Taylor?

Mr. Baker thought the stores looked dull, and wanted to continue an upscale move away from middle-America brands like Nautica and Gold Toe socks and toward hot designers like Theory and Kate Spade. Mr. Hoffman was brought in as C.E.O. to do just that.

On the day after Labor Day in 2008, when Mr. Hoffman accepted Mr. Baker’s offer, the Dow Jones industrials closed at 11,517. By the end of his first week on the job in October, it had sunk as low as 7,774. Almost immediately, sales at mid- to upper-end retailers went into a tailspin. At Lord & Taylor, where rumors were already rampant about its solvency, it was worse.

“We’re a highly leveraged company that now is dropping 15 percent on sales,” Mr. Hoffman recalls about that time.

The holding company seemed to have contracts with just about every troubled business. In addition to its loans financed by Lehman and Bear Stearns — which had been sold off by then, making it beholden to smaller investors — its merchandise was marooned on container ships because of questions about the validity of its insurance policies with the American International Group. A trucking company had stopped delivering goods because its line of credit with Wachovia was uncertain.

“Vendors were asking for 10 percent payment up front, prepayment, 15-day payment cycles,” Mr. Hoffman says. “Goods were coming in two weeks later than competitors’, and we didn’t have enough people in finance to answer the phones.”

As the luxury market tanked, the executives abandoned the upscale move at Lord & Taylor and focused instead on more clothing with mass appeal. They sliced $400 million from the holding company’s budget, and Mr. Baker jettisoned several of his grand plans. An in-house fashion-designer incubator at Lord & Taylor was closed, and he liquidated Fortunoff, which NRDC had acquired out of bankruptcy .

Sales at Lord & Taylor fell 10 percent in the first half of 2009 versus the year-earlier period and were off 2 percent for the year as a whole — still much better than many rivals’ results. And the figures have continued to improve.

That’s attributable, Mr. Baker says, to investment in stores. Profits went into refurbishing them, adding artificial and natural light and switching out brands.

“I think because of his real estate background, the floor space is almost a sacred area,” Mr. Hoffman says. “It’s like tenants paying rent: ‘We’ve got to find what will maximize the return for it.’ ”

Though industry consultants say the stores look good, they question the strategy of carrying brands that can be found anywhere.

“I was in there the other day and I thought it was fabulous,” says Emanuel Weintraub, founder of a firm that consults with retailers and vendors. “The bottom line is, will they be able to get the exclusive brands, or the high-profile brands, that their competitors have?”

The Bay stores have taken a more upscale approach. They have dropped 900 mostly lackluster brands and have brought in new ones like Coach. The Bay, too, will revamp almost all its stores by year-end. Its sales at stores open at least a year, a key measure of retail health, rose 4 percent in 2010, the first increase in more than a decade.

The holding company’s debt problem was largely solved by a transaction struck in January. Target agreed to pay about $1.8 billion for the rights to leases on up to 220 Zellers department stores, a discount chain unit of Hudson’s Bay.

Over all, the Hudson’s Bay Trading Company business now has about $7 billion in retail sales and more than 50 million square feet of real estate worth billions of dollars. For their slice, Mr. Baker and his partners laid out a total of about $25 million. Today, by conservative estimates, that stake is worth nearly $1 billion on paper. For those keeping score, that’s about 40 times their cash investment, though they have yet to withdraw any profit from the business.

MR. BAKER prefers to do most of his business from the back of his Cadillac Escalade. His driver, Kevin R. Maher, leaves it running while idle, in case Mr. Baker wants to save a few seconds getting somewhere.

Unlike old-money sorts who try to play down their wealth, Mr. Baker seems to revel in his. He has Mr. Maher take a spin through the Brunswick School in Greenwich, a private school for which he helped build a new campus. (He attended it, as do his sons.) He alludes to his family’s Gulfstream jet and talks about his art collection.

When not working on deals, he often spends his days walking through stores — and you get the sense that their managers are accustomed to seeing his caller ID come up on their phones.

He is so busy at his stores that another big acquisition seems unlikely for now. But you never know. As his father says: “I’m comfortable that he’s not going to turn around and try to buy General Motors or something — other than if he does it with a little bit of our money and a whole lot of someone else’s.”