FEDERATED MAPS PLAN FOR 15% PROFIT GAINS FOR NEXT THREE YEARS

Byline: Valerie Seckler

NEW YORK — With an eye on California, a revamp of its three major flagships and increased attention to private label, Federated Department Stores unveiled a broad-based plan Thursday for annual profit increases of at least 15 percent between now and 2000.
At a conference sponsored by Smith Barney Inc., James Zimmerman — who will become Federated’s chairman and chief executive officer on May 16 at the company’s annual meeting — and other executives told institutional investors that Federated is out to lift same-store sales by 2.5 to 3 percentage points in 1997.
Federated, the nation’s largest operator of department stores, with sales of $15.2 billion in through its 411 units in 1996, plans to hit those goals in a series of moves, including:
Maximizing opportunities in California, in part through a capital spending plan of $500 million between now and yearend 1999 for the former Broadway stores. Smith Barney reported that new Macy’s stores in California converted from Broadway units have topped financial goals and made money in their first year. So far, 52 Broadway units have been converted to Macy’s.
Boosting private label to 15 or 16 percent of sales from 14 percent of sales, or $2.1 billion, in 1996. Analysts expect market-share gains and a modest improvement in gross margin to result.
Improving store execution, in part by streamlining and cost-cutting logistical operations.
In addition, Federated plans to open five to eight stores this year while closing seven to 10 units, and it continues to scout for acquisitions, primarily outside the U.S.
Other speakers were Terry Lundgren, chairman and ceo of Federated Merchandising, and Karen Hoguet, Federated’s senior vice president for planning and treasurer. Neither they nor Zimmerman were available for comment following the presentation.
“We’ve doubled the company’s size over the past two years,” a Federated spokeswoman said Thursday. “Now we need to focus on pruning less-profitable locations.”
She acknowledged, however, that the company remains open to acquisition opportunities.
According to Richard L. Church, a retail analyst at Smith Barney and co-host of the conference — which was closed to the press — the Federated team said there currently are no attractive acquisition candidates in the U.S., but there may be potential takeover targets abroad.
“They told us that they looked at Barneys, and it was a no-go,” Church continued. “The speculation on Wall Street is that Eaton’s is on Federated’s radar screen, but they didn’t comment on the rumor.”
T. Eaton Co., a Toronto-based department store chain, filed for bankruptcy protection in February, and hired Goldman Sachs and RBC Dominion Securities last month to help it unload up to 31 of its 86 stores by July. Last year, Eaton’s had sales of $1.7 billion ($1.6 billion Canadian), making it Canada’s second-largest department store chain after Hudson’s Bay.
The Federated spokeswoman declined to comment on the firm’s possible interest in Eaton’s or Barneys Thursday, but she acknowledged that there are fewer acquisition opportunities in the U.S. than there were a few years ago.
“This would necessitate our looking off shore,” she added. “There are fewer retailers now, and the survivors have strengthened their businesses.”
Capital spending on Federated’s existing store base is budgeted at $2.3 billion from now through 1999, the spokeswoman said, with $150 million earmarked for the renovation of the company’s three flagships. The Bloomingdale’s Manhattan flagship, along with the Macy’s on Herald Square in New York and on Union Square in San Francisco are slated to be renovated to offer an easier-to-shop, more open presentation of merchandise.
“They’ve been experimenting with the open-selling concept in their cosmetics departments,” Church said. “The concept is built on lower fixtures, higher ceilings and less clutter.”
As for merchandising, Federated is seeking to differentiate itself by expanding private label, while staying focused on better-branded business. Federated’s bridge business accounts for just 1.5 percent of the company’s sales, Church noted.
Moreover, the analyst said he believes the Lauren Ralph Lauren line may get as much as 15 to 20 percent more space this fall at major retailers, including Federated. The company spokeswoman said Thursday that while she did not know of such a plan, “it would be surprising if that were not the case.”
“The line has been very successful and it would make sense for us to develop plans to give it more space,” she added.
Smith Barney investors aren’t the only ones giving Federated a good look this week. Moody’s Investors Service said late Wednesday that it is reviewing its long-term debt ratings on the retailer for a possible upgrade. The rating agency said it was considering the boost because of earnings growth and the successful integration of the Broadway stores.

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