By and  on March 17, 1994

NEW YORK -- Although R.H. Macy & Co. reported healthier figures for its second quarter and for February, many observers were wondering Wednesday whether the chain can sustain the momentum.

The upbeat numbers, reported this week, could give Macy's some ammunition in its battle to thwart Federated Department Stores' takeover bid, but after taking a day to digest the figures, industry observers pointed out:

February may not be the best barometer of a retailer's business.

Cost controls, while boosting the bottom line, may have gone too far and could be depressing service and housekeeping at the stores.

Sales gains are coming primarily from hard goods, and any real turnaround would require stronger apparel sales.

Fidelity Investments, Macy's largest creditor, might back a Macy's reorganization plan to stay independent, but neither party has confirmed an agreement.

While the Christmas quarter was good, it was up against a weak year-ago period.

General Electric Capital Corp. might turn out to be a Macy ally, but it has not yet said so.

The latest Macy figures, released Tuesday, included a 61 percent increase in quarterly earnings and a 5.7 percent comparable-store sales gain in February. The momentum could be continuing. According to a source close to Macy's, sales from the beginning of February through Tuesday are running 12 percent ahead of last year's results and 5 percent ahead of plan.

"February is a funny month to judge a store by," said retail consultant Walter K. Levy. "They may be getting a fast checkout on new merchandise. The real answer is in the March-Easter period."

Said another source, "February is a directional month, but this year not as much because of all the snow days and fall clearances that ran into February."

However, Isaac Lagnado, principal of Tactical Retail Solutions, said "February is important. It's early spring checkouts and directional for spring and Easter. The dress business might come through. Kids should be good for them, too. Macy's has to start the year with strong sell-throughs."

Lagnado said home goods continue to be the strength of the business, but "men's and moderate women's sportswear is beginning to kick in." Fine jewelry is also making bigger contributions.Mark Levin, director of research at Canyon Partners, a Beverly Hills specialist in distressed securities, said, "If they can show same-store sales gains of 8 or 10 percent over the next four months, then they might have a chance. "That seems unlikely and I think Macy's needs another good Christmas under its belt if it expects to come up with a plan that will provide some value for the subordinated bondholders. If they present a plan that crushes the subordinated guys, I think the bondholders will be able to stall the proceedings long enough to run through next Christmas."

One analyst, who requested anonymity, said he thought General Electric Capital Corp., the GE subsidiary that operates Macy's credit card business, might help fund a Macy plan principally to retain that profitable business.

When Macy's ran the credit card operation itself, that business generated pre-tax earnings of well over $100 million a year back in the late Eighties. GECC with its triple-A rating is able to borrow at very low rates and charge about 20 percent on the consumer accounts. In addition, GECC has efficiencies of scale because of its huge credit card operation, so it must be earning much more than Macy's ever did from the credit business.

Since Federated organized its own bank in 1992 to handle its charge cards, if it takes Macy's over, GECC could lose a lucrative operation.

Macy sold its credit card business to GECC in May 1991 for $1.4 billion. While that sounds like a lot of money, the cost covered only the receivables purchased. There was no premium paid for the operation.

The agreement between Macy's and GE is a 15-year deal, but there are provisions for either party to terminate before the term is up. GE could not be reached for comment Wednesday.

Macy's other potential savior, Fidelity, as a manager of mutual funds operating with other people's money, must act in the best interests of its shareholders. Thus, if Federated comes up with a more favorable plan than one proposed by Macy's, Fidelity might be forced to go along, or face possible lawsuits from investors. In Macy's favor, results of remerchandising efforts are just kicking in, analysts said. Todd Slater of UBS Securities said margins may keep rising because of those efforts, including the return of many moderate vendors and new dress shops."You can not conceive of a major turnaround at Macy's without soft goods contributing," Lagnado added. "There's a new sense of energy. The merchants are pushing harder, the store is advertising strongly and didn't abandon that through rough times." "Merchants weren't pushed as hard in 1993 for the results," said a source. "The word from [Macy chairman and ceo] Myron Ullman now is to make it happen. They have to come out with the results."

Ullman could not be reached for comment Wednesday.

Most sources agreed that Macy's seems to be keeping its inventories at reasonable levels, aided by continued heavy promoting and new clearance outlets. Most said the chain is not sitting with a lot of leftover fall goods.

On the down side, there are concerns about cost controls affecting long-term performance. The $68 million expense reduction, which boosted the bottom line for the latest quarter, was dragged out of staffing levels. Regional management has reportedly been pared, which has been giving more work -- and more responsibility -- to branch managers.

Retail analyst Levy said Macy's stores continue to be well-stocked, but he criticized the housekeeping at branches.

"They haven't had the staffing to keep on top of it," said Levy. "If you knock out $68 million, it's got to show up somewhere. They're continually squeezing the staff and it's harder to get service at Macy's than other places."

"We'll never be Nordstrom," said a Macy source. "Customers don't expect it."

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