Tuesday, December 26, 2006

Big hope for small markets

Akron, as well as New York, star of Federated holiday

by Lisa Biank Fasig
Cincinnati Business Courier - December 22, 2006

To an important degree, the sales performance of Federated Department Stores this Christmas depends on how well it does in Akron.

It is in the dozens of markets such as this one, where Macy's is a new and welcome brand, that Federated has much to gain after converting some 400 May Co. stores in September, analysts and industry veterans say. Sure, shoppers in Chicago are grabbing headlines with complaints about losing the Marshall Field's brand, but in smaller markets - like Akron, Tulsa, Okla., and Rochester, N.Y., - shoppers are waiting, credit cards poised, for Macy's to lift their mediocre shopping experience.

And Federated has a high target: It recently raised its same-store sale projections for December to 5 to 8 percent, from 3 to 5 percent.

The problem? It's the original Macy's locations, known as the legacy stores, that have been driving those sales. The former May Co. locations have been "disappointing," Federated said, without providing specifics. (Federated will not break out figures of its May stores operations until February, after it has owned the company for one fiscal year.)

"They put extraordinary attention to making the transition easier in the cities where there was an emotional connection," said Candace Corlett, a principal at WSL Strategic Retail in New York. "(But) we underplayed the number of cities that are getting a Macy's."

What wasn't underplayed was the relaunch of Macy's as a national brand. Federated's ambitious advertising campaign, featuring Susan Sarandon and other stars, might have contributed to the overall strength of the department store sector this shopping season. In November, the same-store sales index of department stores rose 3.8 percent, compared with 1 percent at department stores, according to Bloomberg.

"The Federated stores are doing extremely well. They're benefiting from the advertising," said retail consultant Walter Loeb. "The May stores still have to gain an identity."

Federated has, for instance, ended the aggressive sales promotions that May customers have grown accustomed to at Christmas, Loeb said. Many shoppers are still holding out, expecting coupons and deep discounts. Meanwhile, in markets such as Cleveland, Federated underestimated the spending power of its May shoppers, said analyst Jeff Stein with KeyBanc Capital Markets.

Regardless, Wall Street is more or less forgiving Federated for May's flavorless sales. (Shares closed Dec. 20 at $38.51, up about 18 percent from one year ago.) Timing is part of the reason: Federated began swapping merchandise at May stores in September, replacing the old labels with the Macy's lineup. Some missteps were expected.

"To expect them to turn 400 stores with new merchandise, new nameplates, the same store personnel and with a reduced level of couponing -- to expect all of that to happen and not have the customers blink once or twice -- I would think is unrealistic," Stein said.

Federated spokesman Jim Sluzewski said the retailer gauged market needs by pairing converted May stores with Macy's stores in similar settings. A store in suburban Cincinnati, for instance, would serve as a starting point to determine what labels to stock in a similarly sized store in suburban Akron. The retailer also asked customers what they wanted to keep at the May stores and what they wanted to lose.

"We continue to learn as we go along," Sluzewski said. "It is simply taking a little longer than we had initially thought."

Among the unexpected trip-ups: the home department, where lead times can be three times longer than those of apparel. It can take more than a year to get certain household items on the floor.

As for markets where beloved brands were eliminated, such as in Chicago where Marshall Field's was transformed into Macy's, observers said the backlash is petering out.

"I've been to a couple of the Macy's that have been converted from Marshall Field's, and they seem just as crowded," said Morningstar Inc. analyst Joseph Beaulieu.

Corlett, for one, said she has seen an improvement in service at Macy's stores in the New York and New Jersey markets. "I think they had gotten in touch with how bad they were and they're really working on fixing it," she said.

"What shoppers expect from their favorite store is respect. Stop putting bimbos out there."

And that would apply to Akron, too.

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