Thursday, August 10, 2006

Federated Banking on Making Assimilation Work

NEW YORK (AFX) - Federated is betting it can change how shoppers feel about department stores as it absorbs former May Co. shops and turns its Macy's chain into a national brand with more than 800 stores.

Federated Department Stores Inc., now commanding about 25 percent of the U.S. department store business, based on figures from the U.S. Census Bureau, is using its increased clout to develop more exclusive merchandise and attract younger shoppers with new features such as robotic vending machines that sell iPods.

Macy's first national TV and print advertising campaign will break Sept. 9, when more than 400 stores acquired when it bought May Department Stores Co. a year ago -- including such homegrown names as Hecht's, Foley's, Filene's and Marshall Field's -- are officially converted to Macy's.

So far, the Federated-May combination is on track. Federated, which also operates 40 Bloomingdale's stores, reported on Wednesday better-than expected second-quarter results and raised its second-half profit forecast. Shares rose more than 3 percent, or $1.07, to $34.86, in afternoon trading on the New York Stock Exchange.

Still, the $22 billion behemoth retailer faces a tough battle on price from discounters including Target Corp. and on customer service from specialty stores such as Chico's FAS Inc. as it seeks to hold on to former May customers and attract new ones.

"The big challenge is to hold on to the local loyalty factor while changing the name and changing the format to achieve success nationwide," said Janet Hoffman, managing partner of the North American retail division of Accenture, a consulting firm.

"It's the lack of pizazz that has hurt department stores," Hoffman noted. Yet, she added, the comfort of having a local store has enabled "department stores to hang on to a thread."

Terry Lundgren, CEO, president and chairman of Federated, says he's unfazed by the challenge.

"Macy's will be the largest seller of all the important brands," said Lundgren, in a recent interview. "These are affordable luxury. This is not Gucci or Prada. And we are going to be catering to a large cross section of the American population."

Lundgren emphasized that Federated is not adopting a cookie-cutter merchandising approach. Federated's seven regional headquarters will do the buying and planning regionally, but there will be some differences from store to store, Lundgren said.

For example, there will be upgraded merchandise at the Foley's in the Northpark Mall in Dallas, and Filene's site in Chestnut Hill, Mass. -- places with demographics that can support higher-end products. Meanwhile, the Hecht's site in Marlow Heights, Md., and a Filene's location in Meridan, Conn. will continue to have a moderate-price focus, though more fashionable merchandise.

Jackie Bogue, a customer at the Famous-Barr store in the Galleria in St. Louis, Mo., said she drives more than 70 miles from her home in Bowling Green, Mo., to shop at the store, which will have a more upscale focus as a Macy's.

"I was buying the higher-end things at Famous-Barr, so it wouldn't bother me," she said.

Federated's sales had been sluggish at about $15.5 billion for the four years before the May acquisition, which boosted its total revenue to $22.39 billion for the last fiscal year. Meanwhile, May had lagged behind competitors like Federated because it failed to come up with compelling merchandise and instead resorted to aggressive price cutting.

Through July, Federated has averaged 2.4 percent in same-store sales growth since the fiscal year began in February. Same-store sales are considered a key barometer of a retailer's health.

But Federated said Wednesday it expects same-store sales, or sales at stores opened at least a year, to rise between 3 percent and 5 percent in the last two quarters of 2006, up from an earlier forecast of 2 percent to 4 percent.

In a conference call with analysts, Karen Hoguet, Federated's chief financial officer, said the company had hoped for slightly higher sales at the former May stores, whose business has lagged because of all the disruptions, but their performance was within expectations.

For the quarter ended July 29, Federated reported net income of $317 million, or 57 cents per share, versus a prior-year profit of $148 million, or 42 cents per share. Revenue nearly doubled to roughly $6 billion from $3.62 billion in the year-earlier period. Excluding costs of the May integration and other adjustments, earnings were 49 cents per share, beating a 44 cent estimate among analysts polled by Thomson Financial.

Federated forecast third-quarter earnings of 15 to 20 cents a share and $1.40 to $1.50 per share for the fourth quarter, up from a previous view of $1.50 to $1.62 per share for the combined periods

Federated is capitalizing on its increased clout with vendors to strike exclusive partnerships with fashion brands, a key strategy to set itself apart from rivals. Macy's will also be expanding its store label business, key names such as INC and Charter Club, which have grown three times faster than branded products over the last four years.

Among the new Macy's exclusives is a new line from designer Elie Tahari called T Tahari, coming this fall. Starting in February, Macy's will have exclusive rights to sell O Oscar, an affordable collection from Oscar de la Renta.

A big thrust in Macy's home area will be an exclusive Martha Stewart collection, to make its debut for fall 2007. Lundgren conceived the idea of having up to 3,000-square-foot house environments, developed by KB Homes, at Macy's Herald Square flagship in New York, Macy's Union Square store in San Francisco, and the Marshall Field's State Street location in Chicago.

Lundgren acknowledged fierce competition from the likes of Target and J.C. Penney, which are offering trendier fashions at lower prices, but he believes Federated's store experience will give it an edge.

To attract younger shoppers, Macy's is counting on self-serve robotic vending machines which will offer iPods and eventually other popular consumer electronics. The displays are being rolled out at 180 Macy's stores this fall. Macy's year-old shopping Web site aimed at teens called will also have more power because it can be marketed across Macy's stores on a national basis.

In recent years, Federated has been enlarging fitting rooms and adding television and seating areas. From the 2006 to 2008, Federated said it plans to spend as much as $4 billion in store improvements on the former May Co. locations.

Lundgren also has had to deal with some emotional fallout among some shoppers from the conversion of 11 former May nameplates, ending an era of having homegrown department stores in such major cities as Washington D.C. and Chicago. The worst came from Chicago, where Marshall Field's flagship has been a century-old fixture, though resistance has subsided, Lundgren said.

Paul Arola of Park Forest, Ill., a loyal Marshall Field's customer for 40 years, doesn't plan to stop, though he views the name change as unfortunate.

"I'll always think of it as Marshall Field's," Arola said.

"I know that keeping the name for the namesake is not the right answer," Lundgren said. "The business was not performing for years."

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