By  on April 5, 2007

Trying to narrow the gap with rivals such as J.C. Penney, Federated Department Stores Inc. is spending another $100 million to beef up Internet operations and crack $1 billion in direct-to-consumer sales by next year.

"With the benefit of the national rollout of Macy's, we are feeding this opportunity very aggressively," Terry Lundgren, chairman, chief executive and president of Federated Department Stores, said in an interview Wednesday. "Last year's growth was fantastic."

Lundgren said direct-to-consumer sales grew to $620 million last year, from $450 million in 2005. "In particular, we are seeing exceptional growth in online sales in new Macy's markets such as Illinois, Michigan, Minnesota, Missouri, Oklahoma, Texas and Utah."

Home goods sales, which have been weak in Federated stores, have done well online, Lundgren said. Fine jewelry in the $1,000-and-under price range is another strong category online.

Penney's already has surpassed $1 billion in online sales and is projecting $2 billion in sales, but has not specified what year that goal would be attained. Penney's had a head start online over Federated and other competitors because it already had fulfillment operations and huge traffic generated through its catalogue. Nordstrom and Neiman Marcus also have advanced online operations that are rapidly growing, and Saks Fifth Avenue considers the online business its second-largest single area for volume, surpassed only by the flagship on Fifth Avenue.

"For department stores, it makes a lot of sense to invest in online,'' said Christine Augustine, equity research analyst at Bear Stearns. "It's a way to reach markets where it may not make sense to open stores. In particular, it's interesting for Bloomingdale's. It's a great way for Federated to gauge pockets of demand where there could be justification for opening a Bloomingdale's."

Federated's $100 million expenditure is "pretty well in line with the competition," she said, adding that Nordstrom plans to spend millions over the next two years. Nordstrom also wants to reach $1 billion in sales online eventually, and is about halfway there.

"More and more consumers are getting comfortable buying apparel online. We're not just talking movies, books and music anymore. We've come a long way, and Federated is just in its infancy online."

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