Federated Department Stores sees room to upgrade merchandise

By Teresa F. Lindeman, Pittsburgh Post-Gazette

PITTSBURGH - The venerable, relatively conservative company that for decades operated the Kaufmann's department stores may have underestimated how much its customers were willing to pay for the right clothes.

That was the assessment of the staff at Cincinnati-based Federated Department Stores Inc. when they did a quick study last summer of the almost 500 department stores they were buying in a $17 billion merger with St. Louis-based May Department Stores Co.

In many cases, "We believe that May had been undershooting their customer," Chief Financial Officer Karen M. Hoguet told analysts yesterday during a discussion of Federated's earnings projections.

While analysts would welcome any success Federated has in nudging up average merchandise prices, the company's short-term financial projections were bleak enough to send its shares down $2.44 on the day, closing at $68.37.

The retailer predicted a loss of 5 to 15 cents per share for the quarter ending in April, far below the 73-cent average profit expected by six analysts polled by Thomson Financial Network. Officials said sales should pick up later in the year, with significant improvement in 2007 and a return to "historical peak levels of profitability" by 2008.

The company still expects to find $175 million in cost savings this year as a result of merging the organizations, plus another $450 million next year and beyond.

By September, officials expect all stores being converted to Macy's, including its landmark Downtown store, with new signs in place when a celebratory ad campaign begins.

Federated this weekend begins clearance sales at many of the 70-plus stores -- including three in the Pittsburgh area -- that it is weeding out because of overlap between its existing chain and former May stores. In the last week, it has said that more than 800 positions would be cut in Allegheny County with the closing of Kaufmann's stores at Monroeville Mall and South Hills Village and a Macy's at Ross Park Mall.

Federated officials have said they hope to hire the majority of the affected employees.

They also hope to start offering local customers more of what they want, using what they believe to be better systems than May for tailoring store merchandise assortments based on customer demographics and preferences.

For example, while Western Pennsylvania customers in general have a reputation as being value-oriented, those at the Monroeville Mall Macy's may turn out to be more traditional than those at Ross Park Mall's store, and the clothes would be stocked to fit those needs.

It's expected that the tweaking of merchandise will improve sales, partly by allowing Federated to sell more expensive clothes.