By  on September 6, 2008

On a mid-July day, with Macy's stock sliding on speculation of liquidity issues, Terry Lundgren takes action.

Determined not to let the rumor mill create a maelstrom, Lundgren bats out a letter to his management and the Securities and Exchange Commission asserting that the corporation is financially healthy, cash fl ow remains strong and the store can tap a $2 billion revolving credit facility.

“Maintain the focus,” Lundgren urges his team.

He also breaks from a Macy’s policy not to disclose monthly sales by issuing the numbers on May and June, which were down a combined 1.9 percent.

“This looks like a case of ‘doth protest too much,’” reacts one retail source.

But the weekend passes, Macy’s stock rebounds back over $16, and Lundgren has no problem discussing the brass tacks.

“The rumors were false. People were trading on those rumors. It was unfair to our shareholders and our employees to have that happen,” Lundgren said during an exclusive interview at that time. “It happens to be a very unusual and jittery time in the stock market. We talked [the situation] through and decided to set the facts straight and get the information out to employees.”

Asked if he might reconsider reporting monthly sales to underscore that the Macy’s trend isn’t as negative as Nordstrom, J.C. Penney’s or Kohl’s, Lundgren says no. “I don’t want to change a strategy we initiated about five months ago.” Since becoming Macy’s chief executive officer in February 2003 and chairman a year later, Lundgren has established himself as a change agent who sticks to his guns. He led the $17 billion takeover of May Department Stores in 2005, doubling Macy’s volume to more than $26 billion. He has been steadily consolidating divisions; replacing venerable regional nameplates like Marshall Field’s, Filene’s and Foley’s with Macy’s, despite opposition in some communities, and centralizing much of the merchandising and decision-making away from divisional chiefs. Lundgren has re-created the culture from the former Federated days, when divisions operated more autonomously. Macy’s home store and the marketing are now central units, and there’s been speculation that Lundgren also could centralize cosmetics. He has denied that.

He’s also accelerated the buildup of private label and exclusive goods, ranging from Tommy Hilfiger to Martha Stewart and FAO Schwarz, and hopes that one day half of Macy’s merchandise will be exclusive or near exclusive. Right now, it’s about one-third. Macy’s has been taking bigger positions with fewer, more important vendors, and trying to be the largest seller of almost every brand carried at the store.

With Bloomingdale’s, Lundgren has supported growth to the point where the store will soon announce its first overseas unit, and he launched a “reinvent” program focusing on upgrades and amenities such as lounges, enhanced fitting rooms, wider aisles, less clutter and better signage at Macy’s and Bloomingdale’s. Seventy percent of Macy’s store volume has been touched by the program so far.

There’s a macro-micro approach inherent in Lundgren’s agenda: take Macy’s national and centralize, then tailor the assortments on a door-to-door basis by adding district planners and merchandisers through a program called My Macy’s. The effort is in the first phase, covering about 20 percent of Macy’s volume, and is expected to be rolled out next year if it bears fruit.

With My Macy’s and the May merger, Lundgren’s reputation and the future of Macy’s are on the line. By remaking the business with broad strokes, the tall, 56-year-old Lundgren has transcended a view of some critics that he’s more fl ash than substance. He’s been highly visible in the media and at events and, as one former May executive observes: “He hangs out with [Donald] Trump. He’s at every sports event. The guy is really enjoying the fact that he’s on top at Macy’s. He’s been coronated. The whole market genuflects, but he’s looking fine compared to everyone else in retailing, and sticking with his vision of Macy’s as America’s department store and making it reality by upgrading it and getting exclusives. He’ll see it through and make it work, if he has to stay there another five or so years.”

“Terry puts great faith in his team, welcomes input, but when he makes up his own mind, that’s it. He doesn’t waiver,” adds Arnold Aronson, manager director of retail strategies for Kurt Salmon Associates, which has Macy’s as a client. “He’s not somebody who can be pushed off the course he wants to take. He’s been a terrific leader in a time when department stores are losing market share and consolidation has been the major business model. Terry took a very big step in deciding he was going to take on the May merger. It was a visionary, risky and courageous move, and probably the right step.”

Still, Aronson notes that the merger “has not paid off as much as the initial hope” and has been hurt by the economy turning weak. “Some of the May Co. doors were not ready for the upgrading to the Macy’s brand and did not have the customer base that could be traded up to the Macy’s model. There had to be some backtracking to smooth the rough edges, by changing the mix back to more moderate from more better. When you look at the enormity of the undertaking, the verdict is going to be evolutionary. Terry has not declared victory. He knew there would be a lot of time, sweat, blood and tears—a lot of glitches.”

“I think it was brilliant of Terry to combine May and Macy’s. They were both going after pretty much the same customer,” says Randy Brant, executive vice president of real estate for Macerich, the shopping center developer, which has 54 Macy’s stores in its property portfolio. The attrition of stores in the aftermath of the merger was healthy, Brant adds. With Macy’s closing or shedding about 80 stores after the merger, “instead of having 360,000 square feet of moderate department store space in a mall, it’s now typically down to 180,000 doing close to the same volume,” Brant notes. “This is much better for a developer of land.”

Still, there’s some skepticism about Lundgren’s program of change. Some see a difference between making changes and true innovation. “What we’ve seen so far at Macy’s represents nothing truly new,” says consultant Robert Grayson, a former president of Lerner New York, Limited Stores and ex-consultant to Tommy Hilfi ger Corp. “There hasn’t been anything truly new since the migration of the department store to the suburbs. Most of the progress of those remaining has been by consolidation, cost-cutting and closing doors. Total retail sales generated by the department store sector are declining. The newness is in big-box, specialty stores and the Internet.” However, the Bloomingdale’s division of Macy’s Inc. has enough cachet and prestige to grow and become an international player, Grayson believes.

Not all of Lundgren’s moves have struck gold. The performance of the former May doors converted to Macy’s and a central home merchandising unit at 11 Penn Plaza have not yielded expected results, though improvements have been cited. Anne MacDonald, a former Citibank executive who was hired as chief marketing officer, couldn’t adapt to the retail landscape and was dismissed just months after being hired. Macy’s veteran Peter Sachse was quickly tapped to replace her.

Nor has Lundgren’s overarching objective to significantly improve comp-store sales materialized, though that’s particularly tough to pull off in a down economy when consumers are strapped for cash and spending far less, and with the distractions of all the work involved with the merger and integrating divisions. It’s easier for retailers to lift profitability by cutting costs, rather than by finding appealing fashion that spurs shopping, though that’s precisely where Lundgren wishes he could spend more time.

“It’s what I love the most—the product itself and the marketing of that product,” Lundgren says. “I still go into the marketplace and meet with up-and-coming vendors. If you’re talking about trying to make a relationship that’s exclusive, definitely I need to be involved. Tommy Hilfiger is the biggest one we have done. Lush cosmetics breaks this fall, and we will have a new jewelry line, Luna. It’s fantastic. It’s an upscale look at Macy’s price points. We’re working on another—a huge deal.”

On products and quality, he’s had some good schooling, having been mentored by two legends of the retail business, Allen Questrom and Michael Steinberg. “Allen was his mentor for many years,” says Aronson. “Terry followed him to Bullock’s, Neiman’s and Federated,” which Questrom ran at different times in his career. “With that kind of close exposure, he did take on some of his mannerisms, but I think Terry is his own man.”

Lundgren got into retailing three years after graduating from the University of Arizona. He studied biology in college and considered becoming a veterinarian, but couldn’t get past having to artificially inseminate a cow. He also considered consumer products as an alternative.

In 1975, when Steinberg was a senior home merchant at Bullock’s in Los Angeles (Lundgren is from Laguna, Calif.), he interviewed Lundgren for the training program, and detected some ambivalence. But he wanted Lundgren on board and made him a lamp buyer. “You knew intuitively he was ambitious and had drive. I think he’s always been ambitious, always wanted to get ahead,” Steinberg recalls. “Lundgren was quite a good buyer. He was aggressive, awfully good at jumping on a trend and learned from a lot of people, including vendors.”

Lundgren rose through the buying and store managing ranks, becoming senior vice president and general merchandise manager in 1984. Questrom, who was running Bullock’s, recruited Lundgren to run Bullock’s Wilshire in 1987, where he got a taste for upscale goods. When Questrom was hired to run Neiman Marcus, he recruited Lundgren as executive vice president and, in 1990, when Questrom was tapped to run the then-bankrupt Federated, Lundgren was left holding the ball at Neiman’s and, at 37, became the boss. Lundgren tapped Andrea Jung, currently Avon’s chief, as his top merchant and the two bolstered the business by adding a bridge business and attracting younger customers.

In 1994, Questrom lured Lundgren away from Neiman’s to head up Federated Merchandising and its private label business, where he succeeded Roger Farah, who left to join Macy’s. That was six months before Macy’s was purchased by Federated in 1994. “Macy’s had a pretty good private label business, but it was all over the board,” Questrom says. “Terry consolidated it and focused in on key labels, and had a lot of do with INC [International Concepts] in terms of developing that.”

From May 1997 until April 2002, Lundgren was president and chief merchandising officer of Macy’s. He has been a director since May 1997.

“I came to Federated without any guarantee, but with the hope that someday I would be chosen to run this great business,” Lundgren says.

Given that Questrom had recruited him, there was a good chance his dream would come true. When Questrom decided to leave Federated, he was succeeded by James Zimmerman, though there was always the sense that Lundgren would eventually step up. In 2003 he became ceo, with Zimmerman staying as chairman, and 10 months later Zimmerman stepped down and Lundgren added the chairman title, becoming the first person in Federated’s history to simultaneously hold all three top titles.

“He always was a hardworking guy, and he always has a lot of enthusiasm. He wouldn’t be easy to replace,” says Questrom. “You can’t make it to the top of a company if you are not a good observer. Terry is a pretty observant guy. Other people think they know it all. He was never a guy who thought he wrote the book.”

Lundgren learned much from the late Sy Stewart, founder of the Alsy+Cycle II lamp company, which, during the Seventies and Eighties, was the largest U.S. lamp manufacturer.

“Sy always referred to me as the son he didn’t have,” Lundgren says. “I learned about the promotion and the marketing of the business, and managing the inventory with an umbrella of high-end product. Sy wanted me to carry more expensive lamps in the assortment,” such as Frederick Cooper hand-painted lamps and Chapman brass lamps, in the $300 to $500 range, as well as lamps in the $59 to $99 range, where the volume was.

“Basically, it was the good, better, best strategy that I learned, which is what we continue to emphasize today” at Macy’s, says Lundgren. “It’s always a matter of balance, and making sure there’s a breadth to the assortment.”

Lundgren became so close to Stewart that he almost quit Bullock’s when a divisional merchandise manager wanted him to charge back the cost of an ad to Stewart’s lamp firm. “It was December, my business was up 25 percent to last year, and I told the dmm I’ve got all the marketing I need,” Lundgren remembers. “I also didn’t have any more advertising money. Sy and I had negotiated our seasonal plan. We were finished. But my dmm said just run the ad and charge it back, and I said, ‘I can’t do that.’ But he said, ‘Just charge it back and we will deal with it later.’

“I was sick to my stomach, and I thought, if this is the way my career is going, I don’t want to be a part of it.”

On a Saturday, Steinberg, Lundgren’s gmm at the time, knew Lundgren was distressed, so he called him into his office. “I said I understood I might get fi red, but I honestly couldn’t do it. I don’t feel like it’s right….So Mike picks up the phone without saying a word to me, and calls Sy and says: ‘Your buyer just did you an enormous favor. He didn’t charge you back for an ad. He was asked to, but he didn’t. Let’s you and I split the ad.’

“I was in total shock. In the end we all got exactly what we wanted, and we did it in a completely aboveboard way.”

These days, of course, chargebacks are a fact of department store life. But Lundgren appears to have learned how to address touchy situations in a way that people appreciate, even those like Frank Guzzetta, the former Marshall Field’s ceo who was forced out when Field’s was converted to Macy’s.

“It’s amazing—the Marshall Field’s transition feels like a decade ago,” says Guzzetta, who had voiced opposition to the conversion and knew many people in the Chicago area would be upset. “The most vivid memories of Terry was his sincere desire to tell everyone the story of why it had to happen. He was willing to talk one-on-one with employees, customers and anyone who wanted to challenge the decision. He knew the financial facts and why it had to be done and he was very sincere about wanting everyone to understand and believe.

“I think his on-the-ground, face-to-face communication, his personal calls, shows his real style. He could have made the tough decision and then hidden in his office. Instead, he put himself out on the firing line with the most angry group of customers I have ever seen and heard. He constantly communicated with me and made sure he let me know he understood how difficult the situation I had was….I know Terry felt really bad when people could just not understand, and after five or six conversations with certain individuals, his blood just began to boil, although he never expressed defeat.”

“He’s a very good listener, and a consensus builder,” adds Steinberg, a former Macy’s West and Foley’s chairman. “He’s calm, comes across understated, yet he can be forceful at times.”

When Macy’s bought May, it inherited Lord & Taylor and eventually said it would be sold, stirring anxieties through the store’s ranks. “He was really concerned people understood where he was coming from, and felt that it was very important he meet the senior team to explain his vision of the merger,” says an executive close to the situation. So Lundgren hosted a sushi lunch at the Kitano on Park Avenue. “The fact he took the time was a powerful message. We were the division that was being sold. There was a lot going on, but he didn’t have to pay attention to us.”

Since selling off Lord &Taylor to NRDC Equity Partners in 2006 and other streamlinings, the focus has shifted to getting Macy’s doors up to speed, and implementing the My Macy’s strategy. The organization has been built up so far to about 400 planners and merchants in different districts covering 20 markets in Macy’s East, Macy’s West and Macy’s Central, or about 20 percent of Macy’s Inc. volume.

“It’s probably our biggest idea in quite awhile,” Lundgren says. “It’s only been two years since we changed the names” of the former May doors to Macy’s. “Now we are rethinking the organization to become more locally relevant. The My Macy’s initiative is very big and very powerful.”

Lundgren sees another merchandise opportunity. “There is much more time that needs to be taken out of the delivery cycle. In many cases that means committing to fabric and gray goods earlier in the cycle. We’ve been doing that for at least a couple of years.” With Macy’s private labels INC and American Rag, “We bring in product on a much quicker turn than what you would think.

“We keep thinking about different ideas. You have to. I feel so strongly that you can’t just sit still,” says Lundgren. In a weak economy, “You can’t dive into a bunker. That’s a self-fulfilling prophesy for failure. This is the time when the newness factor is even more important.

“I think over the years, a lot of department stores have worked to retain the businesses that are most profitable, but in some cases they de-emphasized the businesses that were exciting and interesting and brought some newness and sense of discovery to the shopping experience,” he adds. “The idea of expanding restaurant concepts in our stores, we are doing some very new and interesting ideas there, and it’s not just with fast food. It’s high-quality food.”

Macy’s has also been tiptoeing back into the electronics business, after vacating it nine years ago. There’s a J&R computer and electronics outpost at the Herald Square flagship, which Lundgren says is performing strongly. “There is tons of traffic and we sell a lot of product, but it is really not something you put into a typical branch.”

About a year and a half ago, Macy’s brought in Zoom high-tech vending machines to 400 doors, selling iPods. “IPods are what customers want, and this is a cool way of selling the product.” Lundgren doesn’t see much hesitancy to buying high-tech from a vending machine. “Apparently, they’re not nervous about it…more and more customers are comfortable about shopping this way.”

For the upcoming fourth quarter, which is expected to be tough across retailing, Lundgren says, “The holiday period is where Macy’s consistently shines. We should have momentum with the kickoff of our 150th birthday in October. We have a lot of vendor celebrations wrapped around that, to keep the hype and excitement going. And we’ve got the Thanksgiving Day Parade to look forward to and these new arrangements with Hilfiger and FAO Schwarz. While I am not an economist, I think there is going to be a lot of pent-up demand in the fourth quarter. I do believe there will be spending done by our consumer, but we continue to be smart with the inventory management. The inventory is in good shape.

“It’s fantastic to be able to get to 150,” he continues. “I don’t even know who [among brands] is in this club, but it’s got to be very small. The future is what I get excited about. We’ve got all these new initiatives we never had before.

“I get up every morning fired up about going to work. Even my kids say that I am a very positive person. I believe you get up every morning and you choose your attitude,” says Lundgren. “With Sy Stewart, whenever there was any negative thing going on, he would see me for dinner and start yelling about how to make a negative into an opportunity, and how whatever I was doing, I could take it to the next level. Whatever the circumstances, he would figure out the positive side. He always wanted to give me ideas. Obviously, we all face difficult challenges. If you want, you can always find someone who has a more difficult issue than you do. I choose to surround myself with positive-thinking people. That’s the only way to make progress.”

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