Federated to Redefine Department Stores

Cincinnati, OH, August 10, 2006--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 2 percent, or 67 cents, to finish at $34.46 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.