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Macy's becomes winner in store consolidations

The bottom line of Federated's acquisition of May: "Macy's is going to be everywhere now."

By MARK ALBRIGHT
Published March 1, 2005


Capping a century of department store industry consolidation, Federated Department Stores Inc. has agreed to acquire May Department Stores Inc. for $11-billion in cash and stock and the assumption of $6-billion in debt.

The deal, the biggest in U.S. retailing history, creates the building blocks to turn Macy's into a national department store chain with more than 900 stores - about as many stores as Sears, Roebuck & Co. and JCPenney.

It comes on the heels of Kmart Holding Corp.'s pending $11-billion acquisition of Sears and underscores that many aging names in retail are convinced that size is important to their survival.

News of the acquisition, which has been in the talking stages for more than a year, comes the same week Federated converts 184 department stores that have been operating under different brands, including Burdines-Macy's in Florida, to the Macy's nameplate.

"Macy's is going to be everywhere now," said Britt Beemer, an Orlando retail consultant. "They are going from covering less than a third of the country to more than 80 percent."

Indeed, Federated will have a department store presence in 64 of the top 65 markets in the country. Jacksonville will be the only Federated-free zone left.

The unrelenting growth of such big box chains as Wal-Mart, Home Depot and Costco has made life rough for department stores. Specialty chains such as American Eagle, Victoria's Secret and Best Buy have captured the loyalty of the fickle youth market. Meanwhile, luxury retailers such as Neiman Marcus, Nordstrom and Saks Fifth Avenue have waltzed off with much of the high-end trade.

That's left middle-market department stores to endure waves of consolidation and asset rationalization. Federated hopes to wring $450-million in annual cost savings by acquiring May, much of it in centralized advertising. While there are few overlapping markets, analysts figure the deal will lead to closing about 100 unprofitable or duplicate stores in malls.

"This forms a premier retailer capable of better competing in a challenging environment," said Terry Lundgren, chairman and chief executive of Cincinnati-based Federated. "We are proving the department store can be a vibrant form of retail."

By buying its biggest rival among the industry consolidators, Federated will emerge as the nation's 11th biggest retailer with annual revenues of $30-billion in 2005. The sale also squelches speculation on Wall Street that other department store chains such as Saks Inc. or Dillard's Inc. would be the next ones caught up in this round of merger-mania.

Concentrated in the heart of the country and California, May has been struggling for some time to get back on track. In 2004, sales in May stores open more than a year slumped 2.4 percent. The company's 5 percent sales decline during the holidays was a disaster that triggered the ouster of May chief executive Gene S. Kahn. Kahn's departure removed a big obstacle to a sale.

May shareholders will get $17.75 in cash for every share they hold plus 0.3115 shares of Federated stock. That's a total of $35.50 a share based on May's Friday closing stock price. In addition, Federated said it would increase its annual dividend to $1 a share, up from 54 cents.

"That shows our confidence in this transaction," said Karen Hoguet, chief financial officer of Federated.

May operates under an umbrella of venerable regional department store brand names that will be retired over the next few years: Famous-Barr, Hecht's, Kaufmann's, Strawbridge's and Filene's. Uncertain is the future of Lord & Taylor and Marshall Field, a prominent name in Chicago history that was sold to May by Target Corp. last year.

"They are both good names," said Lundgren. "We will do a lot of listening to customers and research before we consider dropping them. My expectation is we will."

That's because Federated is driven by the cost savings of operating only two national brands going forward: Macy's in the moderate-to-better price range and Bloomingdale's at the higher end.

The merger also has implications for the variety of fashion shoppers will find in stores: There probably will be less of it. Hundreds of backstage support people will lose their jobs as May's buying organization is folded into Federated's. Federated remains committed to having regional apparel buyers tailor selection in stores accounting to regional tastes and climate, but has already combined its home products.

Federated anticipates spending $1-billion on severance, store closings and store remodeling to match Macy's latest look. That means upgraded fitting rooms, directional signs and a sales floor less cluttered with merchandise.

Much of the savings comes from having the market power and size to squeeze apparelmakers to deal more exclusives to Federated. Another key to the economics of the deal is finding more customers for Federated's stable of store brands.

May generated 13 percent of its sales from its own store brands in 2004. Most of those brands will disappear. Federated got 17 percent for its store labels and set a goal of increasing that to a third. Retailers generate fatter profits from their own store brands.

--Mark Albright can be reached at albright@sptimes.com or 727 893-8252.