Macy’s Future Analysts Explore the Possibilities

NEW YORK -- Retailers are swarming around the beleaguered R.H. Macy & Co., looking to pick up pieces of the chain or, in at least one case, just take it all.<BR><BR>Federated Department Stores' announcement last week that it had purchased a large...

NEW YORK — Retailers are swarming around the beleaguered R.H. Macy & Co., looking to pick up pieces of the chain or, in at least one case, just take it all.

Federated Department Stores’ announcement last week that it had purchased a large claim against R.H. Macy & Co. as the first step in a planned takeover set off waves of speculation in the retail industry.

On Friday, following a board meeting, Macy’s low-key, but intense, chairman and chief executive, Myron E. Ullman, got on the chain’s video conferencing system and told his legions around the country that the chain is getting stronger and that he’s confident Macy’s will not be broken apart.

December’s EBITDA, he said, was 30 percent higher than it was the same month a year ago, increasing to $266 million, compared to $205 million. Cash in the bank was $40 million higher than forecast for this period in time, at $275 million.

But is the company strong enough to fend off its unwanted suitors and thereby determine its own fate? WWD examines what might happen if:

  • Federated is successful in taking over the New York-based giant.

  • Dillard Department Stores enters the bidding for pieces or all of Macy’s.

  • May Department Stores takes an active role in plucking Macy divisions that fit into its plans.

… Federated Wins

If Federated Department Stores succeeds in taking over R.H. Macy & Co., it would probably sell some stores, close some others and eliminate duplication, especially at the corporate level.

On these points, there is general agreement among observers. They also say that a combination of Federated and Macy’s would be stronger than either on its own.

But that’s where unanimity ends.

Some say that Federated is determined in its efforts to acquire Macy’s and has a good shot at succeeding.Others see the whole plan as a move designed to persuade Macy’s to sell Bullocks back to Federated. Macy’s bought Bullock’s from Federated back in 1988 as part of a settlement of a bidding war between Robert Campeau and the then-chairman of Macy’s, Edward Finkelstein, for Federated. Campeau won and led Federated into Chapter 11 in 1990.

Jeff Edelman, C.J. Lawrence Deutsche Bank Securities, says Federated has a good chance at taking over Macy’s and there would be savings. He estimates that $100 million a year could be saved just by eliminating duplication. “I think it would be a case of one plus one equaling one-and-a-half,” he said.

As to the chances of success in acquiring Macy’s, Edelman says they are pretty good. “If I were a Macy creditor sitting around for two years without seeing a plan and just listening to Macy’s management saying ‘trust me, trust me, trust me,’ I’d be willing to listen to an offer from the outside. You have to take management’s optimistic projections with a grain of salt. If I were a creditor, I’d rather hear an offer from a company with a track record than from Macy’s, which is still struggling.”

Another analyst, who asked anonymity, agrees that Federated would make a good partner for Macy’s. “Together expenses could be slashed and systems improved. Macy’s systems really need help. Also, they could improve margins by getting better deals from vendors. They could make some of these improvements on their own but they can do it better together.”

This analyst doesn’t expect Federated to make a move to block Macy’s from extending its exclusive right to file a plan beyond the current expiration date on March 15. “I think Federated will wait for Macy’s to develop a plan and then top it.”

Said Peter Schaeffer of Johnson Redbook Service, referring to a Federated acquisition of Macy’s, “I don’t think it’s going to happen. It’s just a ploy by Questrom (Allen I. Questrom, Federated’s chairman and chief executive officer) to pick up Bullock’s. As former head of Bullock’s, he knows the company, knows the market and is anxious to get it back.”

Schaeffer doesn’t see any massive savings from the combination of the two companies. “The only real savings I see would be in eliminating duplications in corporate management. But that won’t produce big savings. I think both companies have already cut their expenses down to the bone and are pretty lean.

Schaeffer says that if Federated does get Macy’s, it would sell Macy’s Atlanta operations to Dillard’s and probably the four Macy’s stores in Florida. It would keep Macy’s East, but sell Stern’s or Abraham & Straus or both, possibly to May Department Stores.

Schaeffer says that Sterns would probably be easier to sell than A&S, adding, half jokingly, “If A&S and Macy’s Herald Square were owned by the same company, neither would have as many markdowns as they’ve been taking.

He doesn’t see much chance of Dayton Hudson Corp. joining in dismantling Macy’s. “Dayton Hudson has its own problems right now,” he said, referring to the poor performance by the Mervyn’s division with its heavy exposure in California.

Edelman agrees with Schaeffer that Macy’s Atlanta operations would probably be sold to Dillard’s, but as an alternative, Rich’s could be sold to May Co. The Bon Marche in Seattle might also be sold to May, since it is a relatively small business and geographically removed from the rest of the Macy-Federated units. May has a presence in the Northwest through Meier & Frank and might be interested in the highly profitable Bon Marche.

But how a Federated-Macy combination would resolve the situation in New York City with Macy’s, A&S and Bloomingdale’s in the same trading area, “I just don’t know,” said Edelman.

…Dillard’s Dives In

Acquisitions by Dillard’s are said to be fast, furious and efficient, and stores vulnerable to takeovers fear the Little Rock, Ark.-based chain more than any other potential bidder.

Dillard’s eliminates middle management at stores and replaces them with computers handling such functions as scheduling, inventory monitoring and markdowns. Dillard’s technology is considered the best among department stores.

“No company moves less paper than Dillard’s,” said one retail expert. Or more people.

In a Dillard takeover, merchandise is quickly shifted to an upper-moderate focus and sometimes salespeople are added to help move heavy inventories that are brought in.

Retail analysts speculate that Dillard’s has its eye on about 12 to 20 Macy’s stores, including several of Macy’s nine units in Atlanta; five in Texas, and four in Florida.

Dillard’s, whose annual volume totals some $5 billion, is ready to cherry-pick Macy’s. Here’s are the reasons why:

Dillard’s has a strong presence in all states around Georgia, but no presence at all in Georgia.

Dillard’s has a big stake in Florida, with 28 stores, but minimal presence in the southeast part of the state, where Macy’s has some units.

Dillard’s has been moving west, but has no stores in California, prompting speculation that Macy’s units there would be of interest — but not the pricier Bullock’s or I. Magnin units. Dillard’s closest stores to California are in Las Vegas and Salt Lake City. Dillard’s could take over some of Macy’s five Texas stores as well, including four in Houston and one in Dallas. Dillard’s operates over 60 stores in Texas.

Dillard’s may be in a strong cash position as it hasn’t made a major acquisition since 1990, when it purchased Ivey’s from Batus, giving it 23 units in the Carolinas and Florida. Subsequent acquisitions have been smaller, including seven Maison Blanche Florida units in 1991, five Joseph Horne units in Ohio in 1992, and eight Hess’s units in the South last year.

“Dillard’s wouldn’t want to buy the whole Macy’s chain. They’re not thrilled with the Northeast, or Magnin’s or Bullock’s,” said William W. Whyte, securities analyst at Stephens Inc., investment bankers.

Typically, Dillard’s operates 180,000-to-240,000-square-foot units, preferring regional malls to urban sites like Macy’s big downtown Atlanta flagship. “They like sites with several anchor tenants, with parking availability, and easy access for their trucks,” Whyte said. That’s important for quick turnaround and smooth distribution, enabling the chain to bring in fresher goods and constantly be in stock in size and color.

At Dillard’s, key labels include Liz Claiborne, Leslie Fay, Ellen Tracy, Russell, London Fog, Coach and Gant. Its image is more moderate than Macy’s, less private label oriented and less promotional. It offers more credible pricing with shorter markups. In some instances, however, Dillard’s carries designer merchandise, which can be as upscale as Escada.

While Macy’s tackles such markets as Atlanta, Philadelphia, New York and Washington, Dillard’s generally zeros in on secondary markets such as Tampa or St. Petersburg, Fla. Dillard’s has a clear focus, tight inventory controls, and was into EDI before most retailers. As a result, the store has a great command of sales information for planning and control. Macy’s is playing a game of catch-up, regarding systems and moderate merchandise, but gets higher marks for store ambience, visual display, private label development and creative merchandising.

In the last six years, Dillard’s has become more aggressive in shoes, foundations, cosmetics, men’s pants and moderate to upper moderate sportswear.

Macy’s is stronger in cosmetics, home, contemporary and private label areas, and is catching up in moderate sportswear.

Dillard’s is an operations role model for Macy’s and other chains. Its key to success is that it has made major investments in distribution centers and technology, and manages well doing only around $120 a square foot in sales. Expense ratios read more like a Wal-Mart than a department store, and a boost in productivity would send profits soaring.

…May Makes a Move

While May Department Stores Co. is in the midst of an aggressive expansion strategy, a complete acquisition of R.H. Macy & Co. doesn’t seem to be in its plans.

Sources close to the Macy’s Chapter 11 case, however, do not expect May Co. to sit by and watch Macy’s get snapped up by other retailers.

“May Co. might be a participant, but it’s unlikely that they would acquire all of Macy’s,” said one source. “I don’t think they’re interested in the Macy’s name.”

Added another source: “I have never heard that May has ever met with Macy’s. But I can’t believe that May can totally ignore what’s going on with Federated and Dillard’s. If May wants to keep Macy’s out of Federated’s clutches, they might want to launch some sort of defensive bid.”

Sources noted that of all the rumored bidders for Macy’s, May Co. is in the strongest financial shape.

St. Louis-based May Co., which consistently outperforms the sluggish department store industry, said it plans to open 100 new stores through 1997, and is projecting 11 to 13 percent earnings growth and same-store sales gains of 5 to 6 percent.

“They’re not as leveraged and have a lot more financial flexibility than Federated,” the source added.

In the third quarter, May earned $133 million, or 51 cents a share, on sales of $2.7 billion. May’s department store sales rose 8.1 percent, to $2.2 billion.

In 1992, May Co. had total sales of $10.5 billion, including department stores sales of $8.7 billion. Cash flow for the year was an impressive $1 billion.

If May intends to go for any part of Macy’s, sources say their focus would be on Northern California and the Southeast. “The Southeast may be of interest because there isn’t much overlap. It’s a good fit,” said one source. He noted that May Co. operates only two stores in Georgia and six in Florida. Macy’s has eight units in the Atlanta region and five in Florida.

In California, the $1.4 billion Robinsons-May division operates 49 units, but has no presence north of Bakersfield. There are 23 stores under the Macy’s banner in the north. In total, Macy’s operates 44 stores, including 21 Bullocks in the southern portion of the state.

Sources said it is doubtful that May Co. would be interested in the Northeast, given the presence of Lord & Taylor and Filene’s.

Because of May’s proficiency in merging acquisitions into the fold, market observers don’t see any problem with May Co. digesting a chunk of Macy’s.

“These guys keep consolidating divisions and they know how to put things together and run it efficiently,” said one source. Added another: “May has demonstrated an ability to integrate acquisitions and eliminate back office expenses.”

Over the past six years, May Co. has consolidated 14 divisions into eight.

With the consolidations have come the disappearance of some familiar regional names — G. Fox, Thalhimers and L.S. Ayres, for example. Sources, however, do not expect the Macy’s name to disappear if the chain is acquired in toto by May Co.

“May Co. has some pretty strong names such as Lord & Taylor, but never anything as valuable as Macy’s.”

With David Moin and Jonathan Auerbach