By  on May 22, 2006

CINCINNATI — As the integration of May Co. into Federated Department Stores heads to a crucial stage — the conversion of 400 May Stores to Macy's on Sept. 9 — Federated continues to advance its program of exclusive merchandise.

At Federated's annual meeting here, the key message from Terry Lundgren, chairman, president and chief executive officer, revolved around initiatives in ready-to-wear, electronics and even candy. In rtw, the retailer will launch T Tahari, a line of better sportswear, in 122 Macy's stores this September in conjunction with designer Elie Tahari.

"His new T Tahari collection will be inspired by his bestsellers and emerging trends," said Lundgren during his speech to about 150 shareholders. "This line will fill a gap in Macy's current assortment appealing to a neo-traditional customer lifestyle with a heavy concentration of career product." Denim and casual novelty items also will be part of the line. T Tahari will be priced slightly above Jones New York and Liz Claiborne.

In addition, Federated has just extended Style & Co., a private label moderate sportswear line, into home textiles. The home collection currently is in 143 stores. Federated also is getting back into consumer electronics by selling Apple iPods and iPod accessories in a robotics-driven vending machine that is about 7 feet high, 7 feet wide and 4 feet deep. During the meeting, Lundgren demonstrated the specially designed kiosk, which is a self-service touch-screen-activated machine from Zoom Systems, a reseller of Apple products based in San Francisco. Other electronic items such as BlackBerrys, as well as products from companies such as Sony and Motorola, will be tested this fall with the vending machines.

"This is a high-shrinkage category, but it's kind of hard to steal from this," Lundgren said, referring to the Zoom machine. "It gets us back into a category our customer wants."

Federated bailed out of electronics about seven years ago. The category suffered from poor service and lack of profitability, but Federated's Macy's and Bloomingdale's stores have periodically sold electronics for Christmas, and Macy's Herald Square has dabbled in high-end electronics in shops that have sprung up off and on.

Lundgren said some larger Macy's units could contain three or four of the Zoom machines, which could be situated in the juniors, men's wear and home furnishings departments.On the candy side, Federated is rolling out the Frango brand inherited through its acquisition of May last year. Marshall Field's, now called Macy's North, has a highly developed candy business with Frango at the core.

Alos, last month, Federated said it would roll out Martha Stewart Collection to all Macy's home departments in the fall.

After the conversion of the 400 May doors, there will be about 800 Macy's, managed by seven Macy's divisions. The conversion hasn't been easy, and sometimes Federated's sales have slipped as a result. At Marshall Field's State Street flagship in Chicago, "Prada and a couple of high-profile people" have vacated, Lundgren said at the press conference after the annual meeting. Without singling out any vendor, he said collectively, they weren't selling well before and the decision was mutual. "At the same time, several new brands are coming into State Street."

At the 28 Shop, "we will give space to new designers," Lundgren said. "We will take nonselling space and give it to young designers we believe have potential — starving artists, if you will."

Federated's first-quarter sales were impacted by the shift in the timing of Easter and the move of a major sale out of April and into May, Lundgren said. However, he added that Federated is "right on our plans. We feel great about how our business is performing. We are delivering on and exceeding our guidance on every single level." Sales were flat last quarter, but the firm had issued guidance of negative 1.5 percent to 0.5 percent on a comp-store basis.

Affecting the pace of business is the merger of May into Federated. Karen Hoguet, chief financial officer and executive vice president, said key components of the integration leading up to September involved system conversions, assortment transitions, making sure associates in May doors are "good ambassadors for new Macy's doors" and educating them about Macy's merchandise that is replacing May merchandise. Federated is phasing out all of May's private labels, including Ideology and Valerie Stevens, but retaining two opening price point lines, Karen Scott and John Ashford. Hoguet also noted that physical changes, such as putting up Macy's signs, was a big part of the integration job.While all this occurs, the Lord & Taylor division is on the selling block. "The process is going well. The books are out. There is a great deal of interest," Lundgren said.

As far as how Federated's business tracks, Lundgren said it's impossible to be in peak form until assortments in former May doors take shape. Currently, he said, "juniors are on fire ... and dresses are just incredible after being dead for five years." Men's suits, dress shirts and neckwear and footwear in men's and women's also are strong.

Federated is targeting 3 percent sales comps for 2007 and a return to historical peak levels of profitability by 2008 to 2009 of 14 to 15 percent earnings before interest, taxes, depreciation and amortization.

"This is a historic time for Federated as we integrate May and essentially double our business," Lundgren told shareholders. Sales are estimated at between $27 billion and $28 billion for 2006.

Also at the meeting, Federated approved a two-for-one common stock split and an increase in the number of authorized shares of common stock from $500 million to $1 billion. The stock split will be effective through a stock dividend entitling shareholders one additional share of common stock for every share they own. Trading of Federated shares adjusted for the split will begin on June 12.

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