Federated Finds Shoppers’ Habits Hard to Change

CHICAGO _ In the wake of disappointing sales at the roughly dozen regional department store chains Federated Department Stores converted to Macy’s six months ago, including Marshall Field’s, the company is turning to a tried-and-true antidote for boosting revenue: stepping up promotions.

That means more TV promotional advertising and sales as the company attempts to “create more urgency” to lure shoppers into the newly converted stores, Federated Chief Financial Officer Karen Hoguet told Wall Street analysts during a first-quarter earnings conference call Wednesday.

“We need to bring more customers in the new trading area to try the Macy’s store,” said Hoguet. Federated doesn’t break out sales at the former May stores, but JPMorgan Securities Inc. analyst Charles Grom estimated sales in those stores have fallen an average 7 percent so far this year. The “weakness” at the converted locations is a “core component of our cautious outlook on the stock,” Grom wrote in a report Wednesday. He rates the stock “neutral.”

Federated spokesman Jim Sluzewski declined to comment on the JP Morgan report. Federated acquired Marshall Field’s when it bought St. Louis-based May Department Stores Co. for $11 billion in August 2005.

The company also lowered its second quarter sales and earnings outlook, reflecting management’s concern with the economy.

The company expects sales to total $6.0 billion to $6.1 billion, down from its previous forecast of $6.1 billion to $6.2 billion.

And it predicts same-store sales to be flat to up 2 percent, compared to previous guidance of up 1.5 percent to 2.5 percent. The company also lowered its earnings target to a range of 35 cents to 45 cents, down from 40 cents to 45 cents.

With headquarters in New York and Cincinnati, Federated plans to change its corporate name to Macy’s Inc. in June.

Federated Chairman and CEO Terry Lundgren said he was “pleased” with first quarter sales at the legacy Macy’s stores and at Bloomingdale’s. However, sales in the new Macy’s locations were disappointing in the quarter, he said. Total first quarter sales fell 0.2 percent to $5.92 billion, missing the company’s forecast of $6 billion to $6.1 billion.

Sales at stores open at least a year, a key measure of a retailer’s health, rose 0.6 percent, well below the increase of 2.5 percent to 3.5 percent Federated had predicted for the first quarter in a February press release. The former May stores account for about half of Macy’s approximately 800 stores.

Federated posted first-quarter net income of $36 million, or 8 cents a share, below Wall Street estimates, as the former May stores stifled sales growth. Excluding costs for integrating the May stores, Federated had a profit of 16 cents.

Oppenheimer & Co. analyst Bernard Sosnick downgraded Federated to a “neutral” from a buy on Tuesday, saying in a report that “issues with former May stores cloud the outlook” and citing concerns over a slowdown in consumer spending. Ten out of 17 analysts rate Federated a “hold” or “neutral.”

Relying on discounts is a risky strategy because it can cut into profits, said Burt Flickinger III, managing director at Strategic Resource Group, a New York-based retail consulting company. It also goes against Macy’s plan to wean shoppers away from promotions by offering a consistent pricing program called “everyday value.”

Flickinger said Macy’s biggest problem is in Chicago, where Federated mothballed the Marshall Field’s name, alienating customers who already have a wide field of rival department stores to shop.

“They made a disastrous decision to throw the Marshall Field’s into Lake Michigan, one of the best brand names in the business,” said Flickinger. “Normally Federated is very smart strategically and that was corporately uncharacteristic of them to make such a bad business blunder.”

Earlier this month about three dozen Marshall Field’s fans staged a protest rally outside Macy’s State Street flagship in Chicago, the third such demonstration since Macy’s took over Field’s last September. The group, whose mission is to revive the Field’s name, is already gearing up to demonstrate in September at the one-year anniversary of Field’s conversion to Macy’s.

“We’re still looking for the restoration of the Field’s brand,” said Jim McKay, head of Field’s Fans Chicago and adjunct associate professor of architecture at University of Illinois at Chicago. “We want Marshall Field’s back.”

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