New York, May 31, 2006--Federated Department Stores' aggressive timeline for converting its recently acquired May's department stores into Macy's could create opportunities for competitors to gain market share during this summer and back-to-school season, according to Standard & Poor's Equity Research Services.
These and other findings are available in two semi-annual reports on the retail industry, Apparel & Footwear Industry Survey and Retailing: General Industry Survey, published by Standard & Poor's, a leading provider of independent investment research.
With a September deadline to convert about 400 stores acquired as part of the May acquisition to Macy's, Federated faces a number of operational, customer service and execution risks, by S&P's analysis. Additionally, Federated's focus on the conversions could negatively impact the company's merchandising efforts and cause it to resort to discounting merchandise to entice shoppers and meet sales targets. Standard & Poor's Equity Research has a "Hold" (3-STARS out of 5) recommendation on the stock partly because of these risks.
"As business in former May stores becomes disrupted during merchandise changes and renovations this summer, we think Federated may lose some sales to competitors, particularly if shoppers are disappointed by new assortments or alienated via unfocused or under-trained staff," says Jason Asaeda, General Merchandise Stores Analyst, Standard & Poor's Equity Research Services. "Shoppers may choose stores that are more familiar and attentive. If that occurs, Federated may have to use discounts to lure customers back into its stores, which we view as a worst-case scenario."
Standard & Poor's Equity Research Services believes that Nordstrom (NYSE: JWN; $36) could be one of the primary beneficiaries of the issues facing Federated because of its strong customer service reputation and its focus on the luxury market and affluent shoppers. Standard & Poor's Equity Research Services has a "Buy" (4-STARS) recommendation on Nordstrom. Standard & Poor's Equity Research also has a "Buy" (4-STARS) recommendation on Kohl's (NYSE: KSS; $54) because of its continuing efforts to inject newness and higher quality into its assortments, and in the process, broaden its customer base. Chico's (NYSE: CHS; $30; 5-STARS) is a third company that could benefit from potential issues at Federated, in Standard & Poor's view, because of its reputation for strong customer service, its fashion sense and the continued rollout of its Soma line of intimate apparel.
"Federated already faces competition on multiple fronts from specialty retailers, mass market department stores and purveyors of luxury goods. If Federated's customers experience service disruptions or fail to be impressed by the summer and fall offerings, then other retailers have the opportunity to improve their market share," opines Marie Driscoll, Group Head, Consumer Discretionary - Retail, Standard & Poor's Equity Research. "Most retailers use the back-to-school season as a precursor for the holiday season, so a bad back to school could domino into a poor holiday showing. Retailers, like Nordstrom and Chico's, with strong reputations for customer service could benefit the most from the changes at Federated."
