Lord & Taylor doubleheader

Lord & Taylor, Water Tower Place, Chicago, Illinois(photo by Justin Hall, 2003)

Note from Steve: Two related stories on the pending Lord & Taylor sale. One is an AP report, the other a story from The New York Times.

This could either be the best descision for their ultimate survival or the beginning of the end. It's too early to tell.

Federated to Sell Lord & Taylor
CINCINNATI (AP) -- Federated Department Stores Inc. said Thursday it will sell its upscale Lord & Taylor department store chain, saying the business no longer fits with its expansion strategy for its larger Macy's and Bloomingdale's chains.

''We have concluded that Lord & Taylor does not fit with our strategic focus for building the Macy's and Bloomingdale's national brands,'' said Federated Chief Executive Terry J. Lundgren in a statement.

The decision to sell Lord & Taylor was not an unexpected move by Federated. The nation's biggest department store retailer said in fall last year it would re-brand all stores under the name of Marshall Field's, the famed Chicago-based retailer, to Macy's later this year.

Lord & Taylor, based in New York, operates 55 stores mostly in the Northeast, in addition to Illinois, Virginia, Michigan, Missouri and Florida. The business generated sales of $1.566 billion last year.

Federated said it would account for Lord & Taylor as a discontinued operation in its monthly and quarterly financial statements, which will cut last year's fourth-quarter profit from continuing operations by about 10 cents per share. The retailer said it expects to complete a sale by year-end.

Federated sales rose $1.37, or 1.9 percent, to $73 in afternoon trading on the New York Stock Exchange.

Federated Is Seeking Buyer for Lord & Taylor Stores
By CLAUDIA H. DEUTSCH

Federated Department Stores said today that it would seek a buyer for the chain of 55 Lord & Taylor stores that it acquired when it bought May Department Stores in August.

"After a thorough review, we have concluded that Lord & Taylor does not fit with our strategic focus for building the Macy's and Bloomingdale's national brands," Terry J. Lundgren, Federated's chairman, said in a statement.

For now, the Lord & Taylor stores, which are in 12 states and the District of Columbia, will operate as usual. Their eventual fate will depend on whether they are purchased by another retailer that wants to operate the stores or by a financial investor who may have other plans.

Indeed, since August, Federated has been steadily converting the various May stores to the Macy's brand primarily and, to a lesser extent, to Bloomingdale's. A year ago, Federated owned about 200 Macy's stores; by the end of this year, when the conversions are complete, Federated will have more than 800 stores operating under the Macy's banner.

But Lord & Taylor, which had revenues of $1.566 billion in its last fiscal year, does not lend itself as easily to conversion as, say, the Filene's and Burdines stores that May owned. The typical Lord & Taylor store, at 110,000 square feet, is much smaller than a Macy's or Bloomingdale's, which average at least 220,000 square feet. (Macy's New York, with more than two million square feet, is not typical of the chain.) And many Lord & Taylor stores are located near existing Macy's or Bloomingdale's stores.

Moreover, Lord & Taylor's traditional customers are more affluent and contemporary than the typical Macy's shopper, yet not nearly as well-heeled and trendy as Bloomingdale's devotees. Since they do not fit neatly into the demographic groups that Federated is concentrating on, many retail analysts viewed a Lord & Taylor sale as inevitable.

"They weren't going to announce this in September, because they wanted everyone at Lord & Taylor to be focused on the Christmas selling season," said David Poneman, a retailing analyst at TIAA-Cref, which owns about 1.7 million shares of Federated. "But I was 90 percent sure this was the conclusion they would come to."

Investors, apparently, were impatient for a decision. Federated shares, which hit $77 in August, were trading as low as $57.98 at the end of October.

"There was just too much uncertainty about what the company would do with May," said Arun Daniel, a senior analyst at ING Investment Management, which owns about one million Federated shares. Federated shares gained $1.32 today to close at $72.95. "People are more confident that the company has a plan, and will continue to execute on it," Mr. Daniel said.

Most analysts expect that Federated will get $800 million to $1 billion for the Lord & Taylor chain, and will use much of the money to pay down debt. The acquisition of May doubled Federated's revenues, to about $30 billion, but the $11 billion it paid sent Federated's debt load soaring. At the end of its third quarter in October, Federated was carrying $11.8 billion in debt.

Analysts say Federated will most likely sell Lord & Taylor to a private equity buyer like Blackstone or Apollo, rather than to another department store chain. They noted that Lord & Taylor would fit nicely with Saks, but Saks has been busily selling stores, not buying them. Moreover, a private buyer might choose to use or sell the real estate - particularly the very attractive site on Manhattan's Fifth Avenue - for purposes other than stores.

Still, many investors who applaud the sale strategically say it is not enough to woo them to buy Federated shares. They say they are concerned that department stores in general will continue to lose business to deep discounters like Wal-Mart, at one extreme and the myriad specialty stores at the other.

"This industry is consolidating and that's probably good, but I still think the specialty stores offer better growth," said Timothy M. Ghriskey, chief investment officer at Solaris Asset Management.

Similarly, Kimberly K. Bernard, the retailing analyst at Babson Capital Management, gave a thumbs up to the path Federated is taking. But she is not buying the stock. "I still worry whether they can really meet growth goals for same-store sales," she said.