THE NEW FEDERATED
SIZING IT ALL UP

Byline: Valerie Seckler

WALL STREET

NEW YORK--Wall Street likes what it sees.
Analysts believe the merged Federated/Macy's will pack a wallop and could eventually make the company king of the few remaining department store giants.
They praised Federated for its expense controls and its embrace and leveraging of technology, while Macy's was cited for its sourcing, product development and positioning in the marketplace.
"The key things to watch are the efficiencies of the transaction, the effectuating of operating economies across the board," emphasized Gilbert Harrison, chairman of Financo Inc., here, the investment bank which specializes in retail mergers and acquisitions.
He cautioned, "It is unrealistic to expect that Federated will wave a wand and implement all those kinds of changes on day one of the merger. It will take a good 12 to 18 months."
"When they bring the two together, they can reduce costs via economies of scale," agreed Steven Kernkraut, an analyst at Bear Stearns & Co. "They will reduce overlap on all operational fronts, from accounts payable to credit-card operations, and as they consolidate Macy's and A&S, they'll cut advertising costs."
For its first full year of operation with Macy's, Federated is projecting cost savings of between $50 million and $55 million, according to Peter Schaeffer, an analyst at Dillon Read.
Schaeffer believes that, down the road, Federated/Macy's will operate stores under just the Bloomingdale's, Stern's and Macy's names.
Pursuing such a strategy would enable the retailer to "save a lot of money," the analyst reasoned, "and Macy's and Bloomingdale's are the [company's] only two national names.
"They'd be capitalizing on the strengths of the given names--Macy's name and its product-development strength, which is far more sophisticated than Federated's; the ability to fill in the lower end of a given market with Stern's."
Financo's Harrison said, "It would not be inconceivable to see this happen, because the three franchises are the ones that will be used in the New York marketplace." He added, "The three formats do not compete."
Harrison said the competition will shape up as follows: Stern's versus Kohl's; Macy's versus Dillard's and May Department Stores; and Bloomingdale's battling higher-end businesses, but priced "just a bit below Neiman's and Saks."
Analysts will be watching a key barometer of success: sales growth, which Federated and Macy's have found elusive until recently.
"The concern is that they really need to have a healthy sales plan," said Kernkraut. "They need to deliver comp-store gains of 3 to 4 percent. If it's less than that, they'd have to dig deeply into the expense side."
"If you look at Macy's performance of late, this doesn't look to be a problem," he continued. "Macy's sales pattern started improving in recent months to about 4 percent comp-store gains. Federated's been producing 3 to 4 percent comp-store increases for the last two-and-a-half to three years."
Among the moves Federated/Macy's may make, noted Kernkraut, are "finding beachheads" for Bloomingdale's in the Southeast and on the West Coast and converting A&S stores into Macy's in markets where they overlap.
Also, Kernkraut advised, "Look for certain stores to be sold off." He cited Macy's stores in Florida and Texas as likely candidates, as well as some stores that overlap, such as the A&S and Macy's units in Nanuet Mall in Rockland County, N.Y.
Should the retailer put one of the Nanuet Mall units on the block, Kernkraut speculated Lord & Taylor or Penney's might be interested.
While analysts said it remains to be seen how the new retail giant will combine Macy's and Federated's buying systems, Schaeffer said, "I think they'll give their stores more responsibility for buying their assortments than they have as yet."
Analysts are also curious about how the private-label strategy unfolds.
"Federated is underdeveloped in private label and at one point Macy's was overdeveloped--they're not anymore," said Buckingham Research analyst Laurence Leeds Jr. "As a $13 billion retailer, the depth of what they can do in private label is enormous. In basic product, private label is very important.
"If you're not some kind of expert and you walk into Macy's stores and Federated's stores, they look very similar except for private label," he said.
Said Schaeffer, "Macy's needs Federated's financial constraints, and Federated needs Macy's merchandise prowess. There's lots of good management in both companies. They synergize beautifully."
For his part, Schaeffer strongly endorsed Federated's decision to keep "mostly Macy's people running the Macy's East business" which, at roughly $6 billion, represents about 45 percent of the combined companies' sales.
"Questrom is smart to make this move," he said. "It's a good sign that he's seeking to capitalize on the strengths of both organizations."
Several analysts are projecting Federated will earn about $1.80 per share this year, up from $1.53 in fiscal 1993.
Bear Stearns' Kernkraut is forecasting Federated will earn $1.81 per share this year. Also, he said that Federated, in its exit plan, is projecting the combined entity will achieve earnings per share of $1.60 in 1995.
"We're bullish on the stock of the combined companies because we expect strong earnings growth over the next three years," Kernkraut added.
NatWest Securities analyst Robert F. Buchanan is one of the few analysts who has worked out projections for Federated/Macy's, since it is not yet known how many shares outstanding there will be in the new retailer. He's forecasting the company will generate earnings-per-share of $1.54 in 1995, $2.13 in 1996 and $2.61 in 1997.
Other analysts contacted by WWD simply said the retailer expects the Macy's acquisition to dilute earnings the first year, but beef them up thereafter.
Kernkraut noted Federated's earnings before interest, taxes, depreciation and amortization (EBITDA) margin "should be back up around the 11 to 12 percent mark this year, after underperforming for a while."
As for Federated/Macy's debt load, Schaeffer said, "These guys wouldn't have done the deal if they thought they couldn't deal with it. They've both been in Chapter 11 once, and neither of them wants to go back. I think some of the debt will be converted to equity. Moves will start to be made soon."
Judging from the exit plan, Kernkraut added, "I don't think the debt-to-equity ratio will be extraordinarily leveraged. I think they'll try to pay down debt as soon as possible."
Financo's Harrison generally agreed, but issued a caveat.
"The consequences of a too-leveraged balance sheet were thoroughly thought out by Ronald Tysoe because neither retailer wants a repeat of Chapter 11," he said. "What must be rationalized are the long-term effects of the balance sheet, because if Federated/Macy's is going to acquire more entities over time, as it must to survive, it will be difficult to take on additional debt.
"Generally, the company still has a high degree of debt relative to hard net worth," he added. "It is obvious some sort of transaction will have to take place to bring them better ratios. Enough of the debt is long-term that the company doesn't have big worries."
Among the moves Federated/Macy's might make, Harrison speculated, are a debt into equity conversion, equity offerings, or the sale of selected assets.
As for the last, analysts predicted that the Federated/Macy's merger will serve to accelerate the department store business's ongoing concentration.
Dillon Read's Schaeffer said that following a possible sale by Federated/Macy's of some Macy's Atlanta and Rich's stores at the end of 1995, "more consolidation in the industry will follow."
For the moment, he sees Penney's growth as being "stymied" because "acquisitions aren't their modus operandi."
"I think Dayton Hudson will divest its department stores by 2000 to speed the growth of Target," Schaeffer added.
Retail experts believe that the Federated/Merger will spur additional department store consolidation, creating a retail landscape with little variation.
"By the year 2000, there will be four or five department store chains," Schaeffer declared. "Everybody will be part of Federated/Macy's, May, Dillard's and Penney's. There will be no more independents left."
Harrison agreed. "There is no way that the smaller regional department store chains can remain competitive in the long run," he asserted.
--Fairchild News Service

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