Federated Navigates Choppy Waters

The retailer is having trouble with its new Macy's stores, but analysts see long-term strength.
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When R.H. Macy wanted a new trademark for the fancy dry goods store he opened in 1857, he chose a red star to match the one he had tattooed on his arm.

The tattoo was a tribute to the star that had guided Macy in his whaling days when he was lost at sea. And over the next 150 years, Macy's sailed through some turbulent waters in becoming one of the most recognized names in the retail industry.

Now

Federated Department Stores

, which acquired Macy's in 1994, is placing its bets on the name. The company has already converted the nameplates of most of its stores to Macy, and, pending shareholder approval, will change the name of the company itself to Macy's Group on June 1.

The seas, though, are still rough. Federated has had trouble with the hundreds of stores that were changed to the Macy's name as part of its 2005 acquisition of May Department Stores. Under that purchase, venerable names such as Filene's, Marshall Field's and Hecht's were washed away.

Last week, Federated posted fourth-quarter earnings that topped expectations, but the company said the former May stores had weaker-than-expected sales.

Chief Financial Officer Karen Hoguet told analysts during the earnings conference call that Federated was disappointed with the performance of the former May stores, which had been changed to the Macy's nameplate.

"We are doing the right things in these new stores," she said, "but it has taken longer, both to build a customer base and also for sales associates, store executives, as well as customers to get used to the changes."

On Thursday, Federated reported a 1.2% rise in February same-store sales, or sales at stores owned at least a year, missing its prior projection of a 2% to 3% increase. While the company blamed the shortfall on poor weather, the month also was notable because it marked the first time that sales from former May stores were included in the comparable year-earlier period.

Analysts believe that Federated can successfully bring the May stores into the fold, but they say it's going to take time.

"We feel confident in management's ability to turn May longer term," Banc of America Securities analyst Dana Cohen wrote in a recent report. "However, our view continues to be that the issues facing Federated in the May doors are likely to take time to work through."

Michael Appel, a restructuring specialist with Quest Turnaround Advisors, also says Federated will be a strong performer in the long run.

"The balance sheet is very good," he says. "It's just a question of getting it right with the May company."

Appel points out that Federated's other chain, Bloomingdale's, is doing well. Still, about 90% of the Federated's sales come from the Macy's brand.

Federated's troubles stem from difficulty attracting customers at May's regional department stores, who don't feel a loyalty to the new name.

"The more important issue is whether now Macy's can regain the customers that they've lost over the past year or so from some of the old May name plates," says Craig Johnson, president of Customer Growth Partners. "There's been some significant level of attrition. I think the Macy's Group is doing many of the right things to regain them, but many of these customers have still not returned."

Many of the legacy May nameplates, Johnson says, "have proven to be a tougher nut to crack" than Federated may have anticipated.

"It's still early yet," he says. "You can't turn the Queen Mary around in a day."

For some areas, the Macy's change-over isn't just keeping shoppers from the former stores, but it's also provoking anger. Loyalists to the former Marshall Field's store in Chicago have organized a boycott against the changeover to Macy's. Chicago resident Pat Craven says the hostility isn't limited to the Windy City.

"People all over the country have taken it upon themselves not to shop Macy's," Craven wrote in an email. "Here in Chicago, we are very proud of our city and Marshall Field's Stores, but now the quality and vendors we loved are gone. If Federated CEO Terry Lundgren really believes that by changing their group name will bring us back to shop there, sorry to say, they have made another big mistake."

The

Chicago Tribune

reported recently that the Macy's changeover has benefited the company's high-end rivals, such as Neiman Marcus and

Nordstrom

(JWN) - Get Report

, which are now carrying designers that formally were exclusive to Marshall Field's.

Federated spokesman Jim Sluzewski says the company's product line is always evolving and that new lines and labels are coming into the stores all the time.

"We're doing very well," he says. "Performance in those stores continues to improve. While we understand the emotional reaction about changing those names, the status quo of those stores was not working."

Sluzewski says that May's regional department stores were created in a different atmosphere than the one that exists today, in which discounters like

Wal-Mart

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and

Target

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are luring away customers with done-to-the bone prices.

"The regional department stores have been performing poorly for many years," he says, "and groups like Marshall Field's were among the poorest performers."

Kurt Barnard, president of Barnard's Retail Consulting Group, agreed, saying the Federated takeover of May wouldn't have even taken place if the regional stores were doing well.

"You can't run a business on the basis of nostalgia," he says. "You may like to, but it ain't gonna happen."