What's in a name?

Federated hopes it's big profits, national buzz

BY JOHN ECKBERG
CINCINNATI ENQUIRER STAFF WRITER

CINCINNATI - Hundreds of former May Department Store employees at its corporate headquarters in downtown St. Louis got pink slips last week as Federated Department Stores Inc. moved to recreate and perhaps one day dominate the American retail experience.

Cincinnati-based Federated made a $17 billion wager when it agreed a year ago to buy May, betting that it could trim costs, sell divisions, merge best practices from both companies and leverage its nationally known Macy's brand to get more shoppers into its stores and more money spent there as well.

The job cuts in St. Louis, estimated by Federated officials at 490, are the first steps. Other changes are to follow as stores across the country are sold or converted to the Macy's brand this fall.

But will it matter that a department store brand given a national patina by a century-old parade through New York City is coming to hundreds of malls in most major American cities? Will the Macy's appeal alone be enough to bring new shoppers to the mall?

"The jury is still out," said Phil Rist, a vice president for BigResearch, a Columbus-based consumer intelligence company. "Obviously you can create efficiencies by having to only market a single brand across the nation. But at the individual consumer level, I don't know if people are excited. You can change a Kaufmann's to a Macy's, but the staff and lay out remain pretty much the same."

"And that's by design," Rist added. "Stores do not want to lose their loyal shoppers - customers who have a history with a favorite regional department store."

The first part of the Federated equation - trimming costs through job cuts - is happening now and for the past year in St. Louis. Federated projects it will generate savings of $175 million in 2006, with another $450 million projected for 2007.

Federated projects that 35 former May executives will relocate to Cincinnati from St. Louis, with another 300 former May employees working elsewhere within Federated's management or retail structure.

The next critical step is to excite shoppers about its grand plan of creating a national department store chain that will have stores in more than 850 malls in every state except Alaska.

"What the May Co. acquisition allows us to do is to extend the process of reinventing the department store," said Jim Sluzewski, Federated spokesman.

"We have made stores less cluttered. We've reduced the size and tone of in-store signs so they're not screaming at you. We are bringing customers more places to sit and be refreshed - sitting areas in restaurants and coffee shops."

In short, the new department store that Federated envisions is likely to look a lot like the department store of old: a destination place to shop where customer service reigns and quality merchandise is sold at slightly more than discount prices, an approach Federated calls "affordable luxury."

Hit by competition from discounters such as Wal-Mart and Target, as well as higher-end specialty retailers such as Anthropologie and Coldwater Creek, the traditional department store has had a tough time in recent years convincing American shoppers to return to the mall.

By converting hundreds of mostly mall stores to the Macy's brand, Federated executives a year ago were gambling that millions of loyal department store shoppers across the nation will spurn the specialty shops of so-called "lifestyle" centers to find their way back to the local mall.

DOUBTERS WEIGH IN
Plenty of experts remain skeptical of the Federated plan.

"When you start looking for great retailers, Federated's not on the list," said George Whalin, president and chief executive of Retail Management Consultants, a firm founded in 1987 that helps retailers improve performance at stores. Federated is not a client of the San Marcos, Calif.-based consulting firm.

Flat market share, a higher cost of doing business than discount stores where payrolls and fixed-store costs are much less and the whims of a national economy that can drive or slam consumer spending all tend to work against the Federated/Macy's initiative, he said.

Whalin said bringing the May stores under the Macy's banner - and filling up displays with Federated's profitable private brands - could help. Brands such as INC, Tasso Elba, Style&Co., greendog, Alfani and American Rag provide about 18 percent of Federated's revenues.

"Their private-label program is one of the strongest in the nation," said Theresa Williams, director of the Center for Education and Research in Retailing at Indiana University's Kelley School of Business in Bloomington.

The deal has already driven up Federated's share price 23 percent since the merger announcement Feb. 28 - to a closing price of $70.50 Friday. And Federated said last week the acquisition contributed to a 58 percent jump in fourth-quarter profits to $669 million.

But revenues remain sluggish - same-store sales for the year came in at 1.3 percent, and the company projects a 2 percent to 3 percent gain for 2006.

STEPS TO IMPROVE
Within the walls of most Macy's stores, shoppers are already seeing improvements with more functional signs, wider aisles, flat-screen televisions near changing rooms and shopping carts.

Howard L. Davidowitz, chairman of Davidowitz & Associates Inc., an international retail consulting and investment banking firm headquartered in New York City, wonders whether it will be enough. He has watched Federated's efforts in the past year with keen interest.

The company, he said, is extraordinary at squeezing economies from retail systems, particularly in integrating units and finding enhanced profit margins.

Since purchasing May, Federated has:

Sold its credit receivables accounts for an after-tax price of $2.3 billion in a venture with Citigroup.

Paid down debt used for the May purchase by $1.2 billion from proceeds from the Citigroup credit receivables deal.

Announced plans to sell 82 stores that generated revenues in 2004 of $2.2 billion. By February, Federated had found a buyer or swapped 25 of those stores to the regional chain Boscov's and Australian-based shopping mall developer Westfield.

Put May's 55-store Lord & Taylor division on the block. That division brought the company $1.56 billion in revenues last year. A formal and bridal wear division is also for sale.

Phased out central office operations of Filene's/Kaufmann's in Boston, Foley's in Houston, Hecht's/Strawbridge's in Arlington, Va., and Robinsons-May/Meier & Frank division in Los Angeles. All totaled: 4,500 divisional headquarter jobs.

Reconfigured its management structure to create a Midwest division based in St. Louis and create 200 new jobs, most of them in downtown Cincinnati.

In the year ahead, Federated is likely to continue to demonstrate strength in integration, Davidowitz said. "They are very, very good at this."

But on the negative side, he predicted "meager if any gains in market share and a laggard on comparable store sales, particularly when measured against other retailers."

ECONOMIC BOOST LOCALLY
Many Cincinnati downtown businesses are optimistic about the influx of former May executives. "We're hoping for more people to come eat with us," said Jim Paskal, a co-owner of Sports Page, a Vine Street restaurant near the Federated headquarters. "We've done flyers over there for different types of coffees, a buy-one-get-one deal. We're hoping that a lot more people will come in."

In late February, Debi Fischer Martin, a Realtor with Huff Realty based in Anderson Township, sold a $400,000 house in Anderson Township to a former May Co. executive who is relocating his family of four. "Certainly Federated will be relocating plenty of people. I think it has helped offset what might otherwise be a sluggish market as mortgage interest rates have climbed," Martin said.

The biggest wild card for the Federated game plan may be something department store executives have no control over: the health of the national economy.

"Gasoline prices are still eating in the consumers' wallet, and fuel costs are now in the price of products that people buy, bringing about inflation worries," Rist said. "The consumer is going to be more budget conscious in the months ahead. They are going to shop around, or they are simply going to shop less."