Given its past, Federated has experience to suceed in futurea

CINCINNATI —Terry Lundgren, ceo of Federated Department Stores, believes his company, which will be called Macy’s Inc. after June 1, has a compelling story to tell.

“Our company has been through so many changes over the past couple of years,” Lundgren said at an investor day late last month. “We’ve doubled our size, fused organizations, refined merchandising assortments and physically improved hundreds of stores.”

Thanks to the May Department Store Co. merger, Federated expanded from about 400 Macy’s doors to about 850 last fall. Despite some growing pains, such as shutting down duplicate stores and renovating many of the old May Co. banners to become new Macy’s, Federated exceeded expectations for 2006, with a 4.4% same-store sales growth and an earnings per share of $2.30. In addition, thanks to the May merger, Macy’s now has locations in 63 out of the top 65 U.S. retail markets.

“We believe we are focused on two of the best brands in retail, Macy’s and Bloomingdale’s, each occupying a very distinct place in the marketplace,” Lundgren said.

Although Federated will continue to focus some of its energy on the more high-end Bloomingdale’s, there is no question that Macy’s will be a more primary focus going forward as it is the company’s largest vehicle and a national department store. Federated plans on setting Macy’s apart from other department store competitors by emphasizing its heritage as an “affordable luxury” retailer, Lundgren said.

“We have a number of well-known status brands that cannot be found at any other department store competitors; these brands include Coach, Dooney & Bourke, Polo Ralph Lauren and Tommy Bahama, among others,” Lundgren said. “These brands, along with our private brands, are responsible for about 80% of the Macy’s business. They will carry our growth now and in the future.”

Macy’s also has a number of private brands, as well as some limited-distribution labels, which excite its shoppers, according to Janet Grove, vice chairman of Macy’s.

For example, Macy’s offers two exclusive designer brands, T Tahari and O Oscar, in a few hundred of its top doors. Macy’s is also touting its fashion heritage at the local level by having events such as visits from Clinton Kelly, from TLC’s television show “What Not to Wear,” in stores around the country.

Macy’s is also very excited about the prospective sales that will come from the exclusive Martha Stewart home collection that will land in its stores in fall 2008, and according to Grove, the penetration of its private brands continue to grow.

“The penetration of our private label brands reached 20% in 2006,” Grove noted.

Although Macy’s has a lot of fashion excitement to offer its customers, converted Macy’s stores continue to lag, Lundgren said.

“The problem is not the name change; the problem is that these consumers don’t know Macy’s well enough or know their way around the store,” Lundgren said. “This year we will try to…improve customer service and continue to motivate our associates…[and] more carefully tailor brands by door. We know that these results do not happen overnight.”

Expansion could be another potential issue that Macy’s faces in the future. Nearly all the stores acquired by Federated through the May Co. merger were mall-based, while retail development continues to grow away from the mall. Kohl’s opened 85 freestanding stores last year, while JCPenney is opening the majority of the 250 stores it plans to open in the next five years as off-mall units.

Regardless, Lundgren assured that Federated will be looking into a few new locations at lifestyle centers in the future.