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Federated Outshining May

A UBS analyst said May Department Stores Co. has been outstripped by Federated Department Stores Inc. in the areas of strategy and execution.

NEW YORK — Federated’s beating out May Co. in the department store derby.

That’s according to a report Friday by UBS analyst Linda Kristiansen, who said May Department Stores Co. has been outstripped by Federated Department Stores Inc. in the areas of strategy and execution. The divergence, she said, is beginning to show in the firms’ stores. Other analysts backed up the assertion that Federated’s pulled ahead.

Federated is at a “tipping point” with its flexibility and strategies trickling down into visible improvements at the store level, wrote Kristiansen, while May Co.’s “strategies are not yet clearly formulated.”

Accordingly, the analyst upgraded her investment rating on Federated to “buy-1” from “neutral-1” while downgrading May Co. to “reduce-1” from “neutral-1.”

Investors apparently took the news to heart and traded shares of May Co. down 89 cents, or 3.9 percent, to close at $22.19. The stock lost as much as 5.7 percent of its value before rebounding some near the end of trading.

Federated’s stock dipped 25 cents, or 0.7 percent, to $36.33. Both issues trade on the New York Stock Exchange.

Overall, the Standard & Poor’s retail index fell 2.94 points, or 0.9 percent, to 325.75.

A May Co. spokeswoman declined to comment for this story.

Together, the two companies control many of the best-known names in traditional department store retailing. St. Louis-based May Co. has Lord & Taylor and Hecht’s, among others, while Federated, which has offices here and in Cincinnati, counts Bloomingdale’s and Macy’s among its nameplates.

Department stores in general have been pinched, forced to consolidate by the increasing presence and fashion quotient of off-the-mall formats including Kohl’s Corp. and discounters Target Corp. and Wal-Mart Stores Inc.

More nimble specialty chains such as Hot Topic Inc. and Chico’s FAS Inc. have also proliferated, taking a bite out of the pie that had been the department stores’ sales.

According to Kristiansen, Federated’s been more adept at adjusting to these and other changes in the marketplace. “The Federated management team has initiated significant change over the past 10 years and has now virtually closed the performance gap with May. Federated is now positioned to overtake May, which in part may reflect Federated’s comfort and experience with significant change while May has been more comfortable with the status quo.”

She added of Federated: “Strategies that have been gradually implemented over the last several years are coming together and are having a noticeably favorable impact on merchandising and the store environment including more fashion-forward private brands, lower inventory per square foot and its ‘reinvent program.’”

Some evidence of the firm’s diverging fortunes can be seen in the sales line. Last year, Federated’s total sales weighed in at $15.44 billion, while May Co.’s top line came in at $13.49 billion.

Neither retailer has produced comparable-store sales to write home about, though Federated’s comps sales so far this fiscal year are down 4 percent, while May Co.’s have receded 7.6 percent. Last year, May Co.’s same-store sales fell 5.3 while Federated’s were off a lesser 3 percent.

By contrast Kohl’s comps are down 1.8 percent so far this year and were up 5.3 percent in 2002. Much of Kohl’s strength is attributed to the easy-to-shop positioning, characterized by centralized checkouts, shopping carts and pricing visibility.

“You can’t beat Kohl’s at their own game,” observed Kristiansen. “So Federated’s strategy is to increasingly highlight its own strengths as a fashion arbiter in a format that may not offer more convenience but more comfort. May needs to move more rapidly in this direction but instead is stalled, rethinking its merchandising and private brands.”

Several proprietary brands bowed in May Co.’s stores last year, including i.e., which zeros in on women ages 31 to 44. The be label, which was launched with i.e. at the firm’s first fashion show last June, hit a snag when May was enjoined from using the name after a trademark dispute with Bebe Stores Inc. New propriety brands also were added at the firm’s Lord & Taylor division.

McDonald Investments analyst Jeffrey Stein agreed that, “Federated is widening the gap.”

At May Co., he noted, “The taste level of its merchandise is positioned much more closely to Kohl’s, J.C. Penney and Target than Federated and therefore they’ve been hurt by the competitive intrusion in the marketplace.”

Federated is seen as the superior merchant with a more successful private label program. Stein noted that Federated’s INC and Alfani labels are perceived as national brands by some consumers while May Co.’s offerings lack such vitality.

Federated also grabbed a marketing advantage recently, in Stein’s view, by adding the Macy’s name to all of its regional department stores, building one of the industry’s best-known names into a 420-unit chain.

The opportunity to leverage the clout of the Macy’s name nationally is a key leg up for Federated, said Stein. “It would be much more challenging for May to adopt a national branding strategy only because they have so many nameplates and they’re all unique to the region they’re in — they are known regionally, but there is no national nameplate they can operate under.”

Advertising nationally offers Federated “tremendous economies of scale,” he said.

However, Stein said May Co. has been more aggressive on the store expansion front and expanded into the bridal business with the acquisition of David’s Bridal, though that chain does not significantly add to the firm’s profits.

The acquisition of David’s and other related businesses also put May into specialty retailing, a field from which Federated, which started Aeropostale, had earlier withdrawn.

Fixed-income analyst Philip Zahn with Fitch Ratings noted, “May has seen its margins slipping the last couple of years while Federated has done a little bit better from a sales standpoint and a margin standpoint.”

This, Zahn noted, is “some evidence that Federated is doing a little bit less poorly than May in a difficult environment.”

He added, though, “The two companies have sort of merged from a credit standpoint. That’s why we rate both of them the same.”