NEW YORK (AP) – The famed Lord & Taylor chain will go on after its sale to a property development company, but shoppers likely will see a leaner fashion merchant, including perhaps a dramatically smaller flagship store in Manhattan.

Federated Department Stores Inc. announced a deal Thursday to sell its Lord & Taylor department store chain for about $1.2 billion in cash to Purchase, N.Y.-based NRDC Equity Partners LLC, which will be putting its business under a microscope. NRDC is a partnership between principals of Apollo Real Estate Advisors L.P. and principals of National Realty & Development Corp.

Federated said its board has approved the sale, and the deal is expected to close in the third quarter, pending regulatory approvals.

The $1.195 billion deal includes 48 Lord & Taylor stores, including the Fifth Avenue flagship in Manhattan, as well as a distribution center in Wilkes-Barre, Pa. Aside from New York, other locations, predominantly in the Northeast, are in New Jersey, Illinois, Massachusetts, Connecticut, Maryland, Virginia, Michigan, Pennsylvania and District of Columbia.

“It will be business as usual,” said Richard Baker, president of NRDC, reached by phone, noting its intention to keep Lord & Taylor as an ongoing specialty department store. “We are going to do a lot of high-level and granular analysis in order to determine the most efficient way to operate each store.”

Baker declined to give details, but said that NRDC is studying all of its options, including size and locations of each store. NRDC, for example, will be figuring out whether it makes sense to have a slimmer flagship in Manhattan. The flagship is about 600,000 square feet, but could be slashed in half, Baker said.

Baker skirted the issue of Lord & Taylor’s growth potential, only noting that the entire chain could shrink before getting bigger.

NRDC said that it will keep Lord & Taylor’s management team, including president and CEO Jane Elfers, who since 2003 has been campaigning to restore its luster. Elfers could not be reached for comment.

“This agreement concludes a successful process to divest Lord & Taylor,” said Terry J. Lundgren, Federated’s chairman, president and CEO, in a statement. “While Lord & Taylor does not fit with Federated’s strategic focus on building the nationwide Macy’s and Bloomingdale’s brands, it is a well-known niche specialty retailer with a great name, many outstanding locations and an experienced management team.”

In February, NRDC acquired Linens ‘n Things in partnership with Apollo Management.

“Lord & Taylor has been an iconic national brand for 180 years. We believe there is significant opportunity to continue the revitalization of the brand begun in 2003,” Baker said.

Federated, which purchased Lord & Taylor when it acquired May Department Stores Co. last year, announced in January that it was putting Lord & Taylor on the block because it didn’t fit with an expansion strategy for its larger Macy’s and Bloomingdale’s chains.

Lord & Taylor’s performance has slipped in recent years. Fixing it is going to be challenging, analysts say.

The department store chain, founded in 1826, had established a reputation for offering American classic design but lost its highbrow appeal in the 1990s amid fierce competition when it began to trade down to lower-priced merchandise.

The retailer’s problems grew with increased competition from specialty stores like Chico’s FAS Inc., which developed a strong following for the over 35-year-old female customer.

In 2003, Lord & Taylor, under Elfers’ leadership, decided to close 32 underperforming stores in 15 states and spearheaded a makeover aimed to bring back more exciting merchandise to its floors. The retailer eliminated moderate-price labels that were overly distributed elsewhere and brought in trendier brands such as Kate Spade. But efforts to bring back the more well-heeled customer have been mixed.

The new buyer’s plans to keep Lord & Taylor as an ongoing chain surprised some analysts.

“I was shaking my head a little bit. I wasn’t expecting it to be bought as a going concern,” said Patricia Edwards, who helps manage retail funds for Wentworth, Hauser and Violich investment counselors.”If they are able to bring back merchandise that really surprises and delights their customers, then they will be able to continue as a specialty department store chain. But they can’t wallow around in the mire of mediocrity.”

Ironically, L&T will be facing even more cutthroat competition this fall from its soon-to-be former parent Federated. That’s when Federated will be converting most of its mid-brow May Co. stores to the Macy’s brand by September, transforming it from a regional player to a national fashion retailer with more than 800 stores. Macy’s will focus on more exclusive partnerships to drive traffic.

Shares of Federated rose 33 cents to close at $36.13 on the New York Stock Exchange.

AP-ES-06-22-06 1734EDT