CINCINNATI — While many analysts believe the current economic turmoil is the great comet that will render the department store, retailing’s dinosaur, extinct, Federated isn’t ducking.

In an interview Friday following his first annual shareholders meeting since becoming chief executive officer, Terry Lundgren emphasized what Federated Department Stores is doing to shape its own fate — from simplifying pricing to remaking stores.

The war, the sluggish economy, the anemic financial markets — “those are all external issues. Those issues are going to resolve themselves one way or another,” he said. “My view is when those external issues are improving, we will benefit from that.”

Lundgren said he didn’t expect the economy to improve until later this year. Despite reporting Wednesday that first-quarter same-store sales fell 5 percent, the company is sticking to its full-year forecast for comps to be down 1.5 percent to flat.

That said, Lundgren emphasized what Federated is doing to help itself. The company’s “reinvent” program — remodeling stores to improve the shopping experience — has been completed in about 40 stores and is slated for 100 more this year. Cosmetically, customers have reacted well to the changes, which include shopping carts, fitting room enhancements and price-check machines. “The feedback’s positive, not only from consumers, but we’re now starting to see some positive trends, businesswise,” he said.

Only recently has Federated completed enough of these remodelings to begin to think about marketing them.

“In Atlanta, for the first time, we’ll be able to have a full-market coverage of all of these reinvent initiatives, and we’ll be able to advertise in the fourth quarter why our store is different, why shopping in our store is better than it was in the past and, hopefully, better than other alternatives,” he said.

Leveraging those changes is how Federated intends to grow, he said.

“In the current environment, there are fewer attractive [acquisition] opportunities on the table,” Lundgren said.

So, growth will come from getting current shoppers to spend more, and attracting new shoppers. “[Business grows]through comp-store sales. If we can grow our business the way we’re projecting beyond 2003, we’ll be a very successful company,” he said.At that sales level, “a lot of really good things happen for us. We can leverage that sales growth with tremendous cash flow and have many options to reinvest in our stores, expand the reinvent idea, get the marketing machine going faster than we would otherwise have planned and fuel growth beyond even that level, once we get that momentum going.”

Federated will continue to better differentiate its collections, weeding out marginal lines carried by its competitors, working with vendors to develop special lines — particularly in women’s apparel and home furnishings — and by continuing to expand its private label business.

The April deal with Tarrant Apparel Group, in which Federated will carry a line of American Rag clothing for juniors and young men, is typical of the differentiation effort. And Lundgren called INC, Federated’s private label women’s apparel line, “the fastest-growing business in the store, bar none….Customers don’t understand that it’s a private brand, which is exactly what we hope for. That is a very important success story in our company.”

It’s such a success that INC will be extended to men’s wear in 125 stores for 2004, the company revealed Friday. “We are extending that brand to men’s wear because of wide acceptance,” Lundgren said. “The reality is women buy a lot of men’s clothing, men’s sportswear. We already have the name recognition with this customer, and to extend the brand and that product is a natural opportunity.”

He added the company’s effort to simplify pricing is one of its most important initiatives. Federated is couponing less than it did a year ago, and will expand the amount of products under the “Best Value” everyday-low-pricing umbrella from less than 3 percent of sales today to more than 10 percent in two years.

“The longer-term objective is to make it simple for the customer to understand what the value is,” he said.

The current economic environment even creates some opportunities. Lundgren said the falling dollar will help the company save money on the goods it buys overseas. In private label, the company can do two things — either lower prices, or keep prices the same and put the savings into improving quality.

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