The Corporation: STRATEGIES
TIME FOR FEDERATED TO STOP BUYING--AND START SELLING
The big chain is spending billions sprucing up its stores
On Manhattan's Herald Square, Macy's 96-year-old flagship is getting a face-lift. A restaurant is under construction, new floors have been laid throughout the store, and brighter halogen lights seem to illuminate every pile of towels.
Even the merchandise is under repair. Next to the usual designer names, Macy's is increasingly hawking private brands created by its owner, Federated Department Stores Inc. From the rows of INC suits for young working women on the second floor to a bed covered with Charter Club striped damask sheets on the sixth, the company is pushing its own labels. "This is what the other stores won't do," says Federated President Terry J. Lundgren. "It takes a major commitment."
The Macy's makeover is part of a renewed push for top-line growth at Cincinnati-based Federated. Since emerging from a painful bankruptcy in 1992, the chain--which also owns Bloomingdale's and a flock of regional chains--has focused on two things: cutting costs to bolster profits and acquiring new stores to fuel growth. Spearheading the strategy was Allen Questrom, the smooth and stylish retailer whose remarkable ability to control spending and cut deals with vendors sparked the turnaround.
After Questrom retired unexpectedly in early 1997, his successor, James M. Zimmerman, found himself facing a new problem. Survival was by then assured, but the new CEO needed to find a way to boost internal growth. For years, the focus was on cutting costs and not on sprucing up stores or basic merchandising. "They squeezed too hard," says Michael B. Exstein, a retail analyst at Credit Suisse First Boston. "They were overly cautious."
That's why Zimmerman, Questrom's soft-spoken protege, is now zeroing in on boosting performance far closer to home. In addition to broadening brands such as Charter House from clothes into housewares and other areas, he is pouring $2.3 billion into capital investments over the next two years. "The most important growth now," says Zimmerman, 54, "is growth from the stores we have."BUYING SPREE. The changes are coming none too soon. Sure, Federated's earnings have more than doubled, from $635 million in 1995 to $1.34 billion in 1997, on sales that have soared from $8.3 billion to $15.7 billion. But most of that growth has come from rapid-fire acquisitions: In 1994, Federated swallowed Macy's for a total of $4.1 billion, then bought Broadway Stores the next year for $1.6 billion. With no further acquisitions on the horizon, analysts expect sales growth to slow quickly.
The push won't be Federated's first transformation. In the late 1980s, burdened with debt by then-owner Robert Campeau, the mercurial Canadian financier, Federated's service and merchandise suffered as the company squeezed cash to make interest payments. By 1990, it was in bankruptcy.
That's when a generous pay package lured back Questrom, a Federated lifer who had gone to Neiman Marcus when Campeau took over. Together, he and Zimmerman, who began his Federated career as a salesman at a Houston store in 1965, focused on improving each store's return on investment.
They sold underperforming stores and exited lower-margin merchandise such as consumer electronics. Financial controls were tightened, and extensive point-of-sale bar scanners were added to let Federated tally prices and keep close tabs on inventory. Questrom's strong relationship with vendors helped him win money-saving concessions such as having vendors put clothes on hangers before delivery. And as earnings recovered, Questrom paid down debt, shaving off $70 million in interest payments in 1997 alone. The result: Net margins blossomed from 1.9% in 1992 to 3.7% last year, sending the stock soaring. Up more than 300% since emerging from bankruptcy, it now trades around 52.LOOKING DOWDY. Questrom, 60, retired early last year to travel and pursue other interests. This winter, he filed suit against Federated, claiming he is owed $47 million in compensation miscalculated in 1995. Neither Questrom nor the company would comment on the suit.
But the turn of events has not weakened investor support for Federated. "We think they have one of the best management teams in the retailing industry," says Jerrold K. Sensor, a portfolio manager at Institutional Capital Corp. in Chicago, which holds about 5 million shares of Federated stock.
Still, Zimmerman and his execs have plenty of work ahead. Of particular concern is Federated's sales growth in stores open for more than a year. An anemic 2.7% last year, that growth is a full percentage point less than prime competitors St. Louis-based May Department Stores and Birmingham-based Proffitt's Inc., which recently purchased Saks Fifth Avenue. Both have benefitted from their consistent ability to stock popular products at the right price and time--and neither has been distracted by anything like Federated's financial difficulties.
Moreover, Zimmerman will have to boost those numbers at a tough time for the industry. Department stores continue to lose market share to discount stores and other venues. Among younger consumers in particular, department stores are generally as out of style as last year's merchandise. Questrom points out that it will be hard for Federated to grow faster than the economy's 2% to 3% expansion without further acquisitions. "It's not possible for a mature company to get much out of that range," he says. "That's what they'll have to live with."
While not ruling out an acquisition, Zimmerman prefers an internal focus. To lure customers back, he plans to spend $1.6 billion renovating Federated's 400 U.S. stores, many of which had gotten somewhat dowdy during the cost-cutting years. A big chunk will go to spiffing up the chains' flagships in hopes of making them must-stop stores.
To attract younger shoppers, Lundgren has selected a team of execs to rethink Federated's format. The idea is to target younger buyers without alienating the baby boomers who are department stores' core shoppers. "We're going to stay with it until the whole store has changed," says Lundgren, who says an entirely redone test store should open sometime in 1999.
Another top priority: continuing to add to Federated's stock of private brands. With margins that average 2% higher than what Federated makes on outside brands, private labels have been Lundgren's biggest success so far. They are now 15% of Federated's wares, or $2.3 billion in sales last year, up from 5% three years ago. But Lundgren doesn't plan to go beyond 20% of sales.
That's because Federated, in boosting its own labels, is competing more and more with the national brands that are its main suppliers. And the risks of missing a fashion trend are greater when the store owns the merchandise. "The private label is a double-edged sword," says Maurice Marciano, chairman and CEO of Guess? Inc., a Federated supplier. "It's great when it's doing well, but when you miss, it costs a lot."
Zimmerman is also investing heavily in such alternative ways of selling as the Net and mail-order. An expanded macys.com will move beyond showing goods to selling products online. Macy's also plans to copy the Bloomie's By Mail catalog, which generates $150 million. Together, the moves should add about $700 million to revenue over the next three years, a 5% boost to sales. A small step, perhaps, but a step in the right direction. "It used to be fashionable to paint department stores as dead," Zimmerman says. "Actually, they've been quite flexible, the chameleon of retailing." Spoken like a man in the midst of changing his colors.By Peter Galuszka in CincinnatiReturn to top