Federated Faces More Trouble Ahead

Don't think the disappointments are over for Federated Department Stores(FD Quote).

The retail heavyweight posted weaker-than-expected first-quarter results Wednesday and notched down its second-quarter outlook amid a soft sales showing.

Look for more of the same as 2007 progresses. I expect Federated will have trouble meeting even the low end of its forecast for the year as the company grapples not only with lackluster sales but also with margin problems.

Federated traditionally is a good retailer. It isn't afraid to change with the times and take risks. It has created a solid array of private-label goods, has sought to improve the customer experience by expanding dressing rooms and is attempting to keep shoppers within its walls by testing cafes in the stores. This is not a company that sits idly by when problems arise.

But make no mistake about it: Problems have arisen. The biggest one is the company's difficulty in attracting shoppers to stores that have recently been converted to the Macy's nameplate.

Federated acquired May Department Stores in 2005 for $11 billion, and the company spent much of last year switching hundreds of May stores, including such venerable brands as Foley's, Filene's and Marshall Fields, to Macy's. Shoppers simply didn't want the change, and Federated said this problem continued in the first quarter.

Management said on the conference call that the difficulties with the new stores were spread nationwide. It would have been better to hear that Macy's was not resonating in one area, because that would have been an easier fix. Reversing the trend around the country will be more complex -- and expensive.