Federated’s 55-Store Chain Goes Up for Sale

By Lorrie Grant

Federated Department Stores put its newly acquired Lord&Taylor division on the auction block Thursday as it focuses on expanding its Macy’s and Bloomingdale’s brands.

Cincinnati-based Federated got the 55 Lord&Taylor stores in its August purchase of May Department Stores.

“Lord & Taylor does not fit with our strategic focus for building the Macy’s and Bloomingdale’s national brands,” Federated CEO Terry Lundgren said in a statement. He said the company expects to close a sale this year.

Lord & Taylor, a somewhat upscale department store group, has struggled for a niche, and declining sales hit $1.6 billion in 2004.

Shedding Lord & Taylor is Lundgren’s final major move in sorting out the pieces of the $12 billion May acquisition. Previous steps include divesting the David’s Bridal and After Hours formal wear stores owned by May. He also made a controversial decision in September to change the name of the 62-store Marshall Field’s chain to Macy’s.

The Lord & Taylor decision was not a surprise to industry experts.

“Everybody expected it to happen because Lord & Taylor had lost its cachet,” says Kurt Barnard, president at Barnard’s Retail Consulting Group. “It seemed to be a left shoe on the right foot. It didn’t fit into the overall scheme of the Federated stores.”

For now the Lord & Taylor name in its elaborate script graces nine free-standing stores and anchors in 46 malls, but the department store brand is not expected to survive the sale.

“It’s unlikely that Federated will sell the Lord & Taylor chain to another department store, which could in turn compete with them,” says Faith Hope Consolo, chairman of Prudential Douglas Elliman’s retail leasing and sales division.

One interesting possibility forecast by Citigroup analyst Deborah Weinswig in a research report on Thursday: A private equity firm might buy Lord & Taylor and luxury department store chain Saks Fifth Avenue and combine them.

Saks Fifth Avenue parent Saks Inc. announced Monday it was putting up for sale its sole remaining midtier department stores, Parisian. That would leave it with just Saks Fifth Avenue — and could make it more attractive to a private equity buyer as a pure-play luxury retailer.

Federated is being advised by JPMorgan and Goldman Sachs. Goldman Sachs is also advising Saks Inc. along with Citigroup.

Over the past 20 years, the number of independent department store chains has declined by more than two-thirds, from about 60 to less than 20 chains, Weinswig adds.

“Consolidation has been the natural result of a lack of organic growth, aggressive competition from the discounters and clubs, and persistent cost pressures, leading department stores to turn to mergers in order to add scale and gain efficiencies,” she wrote.

Consolidation, however, also has been driven by groups of private equity and real estate investors who have kept some stores and profited from selling other locations.

For example, Kmart bought Sears and made an immediate return selling underperforming locations to big-box retailers such as Home Depot.

Others were attracted by marquee brands, such as the takeover and operation of Neiman Marcus by Texas Pacific Group and Warburg Pincus.

Lord & Taylor’s flagship, in a valuable location on New York City’s Fifth Avenue, is its best-performing store, but its disappearance might not be a huge loss for the city’s retail scene, says Barnard.

“It is time that Manhattan got itself its first really splendid discount store, so the sale opens the door to the arrival of Target, or maybe even Wal-Mart,” Barnard says.

Federated will account for Lord & Taylor as a discontinued operation, and that is expected to cut fourth-quarter 2005 results by about 10 cents per share.

Shares of Federated finished at $72.95, a gain of $1.32, or 1.8%.

(c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.