GOODBYE TO STERN’S: TO SWITCH TO MACY’S AND BLOOMINGDALE’S
Byline: David Moin
NEW YORK — Federated Department Stores, facing tougher competition in the Northeast, has decided to shut down the entire $850 million, 24-unit Stern’s division and convert most of its units to the flashier and stronger Macy’s and Bloomingdale’s divisions.
Seventeen Stern’s stores will be converted to Macy’s, two will become Bloomingdale’s and five will be closed.
Of the 7,400 Stern’s employees in total, about 2,600 from Stern’s headquarters in Paramus, N.J. and from stores that will close, will be let go but given priority consideration when other jobs become available at various Federated operations. Some 4,800 at Stern’s stores will shift to similar jobs at Macy’s.
Stern’s was founded in Manhattan in 1867 as a one-room dry goods store on Sixth Avenue by the Stern brothers. It was once known as “the show business” store because of its many promotions and became part of the former Allied Stores in 1951. Stern’s became affiliated with Federated in 1988, when Allied Stores, then owned by Robert Campeau, took over Federated. Federated and Allied went bankrupt in 1990 and emerged together from bankruptcy in 1992 as a combined entity.
Lately, it’s been distinguished by aggressive price promoting, moderate brands and little else. But Stern’s has always been profitable under Federated ownership, albeit not always to the desired level. At one time, Federated did consider Stern’s a potential rollout vehicle as part of a “good, better, best” three-tiered department store strategy for Stern’s, Macy’s and Bloomingdale’s. However, until Thursday’s decisive announcement, Stern’s was in a holding pattern for as long as Federated owned it, and never expanded outside the New York-New Jersey area.
The Northeast is considered Federated’s stronghold. By eliminating Stern’s and bolstering Macy’s and Bloomingdale’s, the corporation hopes to further its dominance, in the face of intensifying competition primarily due to the entry of Kohl’s and Target in the past two years.
Of the 24 Stern’s units, 17 will be converted to Macy’s, representing about $500 million in added volume for the Macy’s East division. It also represents opportunities to experiment with smaller stores and new formats.
Bloomingdale’s will pick up two sites, in Willowbrook and Bridgewater, N.J., giving the upscale division a total of four stores in the state. “We should do very well with these two new stores,” said Michael Gould, Bloomingdale’s chairman and chief executive. “Our Jersey stores in Short Hills and Bergen County have been terrific for the last several years. Bloomingdale’s is very strong in the metro area.”
Sources said Bloomingdale’s posts about $150 million in combined annual volume at its two New Jersey stores, and could ultimately double its volume in the state with the additions. Both new units will eventually be full-line stores, with about 270,000 square feet in Willowbrook, and 170,000 in Bridgewater.
With many more stores to absorb, the challenge at Macy’s is far greater. “The organization has been through this before,” stated Hal Kahn, Macy’s East chairman and ceo. “When we consolidated A&S and Jordan Marsh [in 1994] into Macy’s, it was a much bigger undertaking,” involving roughly $1.3 billion in volume. It was not an easy assimilation, with Federated discovering regional taste differences and problems combining systems.
If the consolidation is executed properly, Kahn said, “We can service a broad customer and be very productive in a variety of formats and multiple locations. We have a lot of opportunities to leverage the Macy name as sites become available.” Initially, “the major objective is to ‘Macy-ize’ quickly and protect the volume and margins through the spring and fall,” Kahn explained. “By the middle of May or thereabouts, the Stern’s units will be called Macy’s. We probably won’t get them fully converted until Labor Day.” In 2002 and 2003, Macy’s will start full renovations of some of the stores.
Kahn noted that there is much merchandise overlap between Macy’s and Stern’s, with both carrying such resources as Liz Claiborne, Polo Denim, Philips Van Heusen shirts, Dunner and Jones. “Much of what Stern’s carries is skewed more to moderate. We skew it more to better,” Kahn said.
“Decisions [on merchandising] will be made on a store-by-store, location-by-location basis, based on the demographics of the area. Our objective is to merchandise in line with the customer profiles, and if there is overlap, we might give one Macy’s a more moderate slant and a better orientation in another.
“Decisions will be made in the next 30 days.”
For example, in Queens, where Macy’s will take a Stern’s in Douglaston, there’s already a Macy’s not too far away in Manhasset, in Nassau County. Kahn said the stores will be different. “Manhasset is a headquarters store, while Douglaston is smaller and will have a more moderate offering.”
Macy’s is also taking over the Stern’s in Hicksville, which is situated between Macy’s stores operating in Huntington and Manhasset. “We have to figure that one out, though Hicksville has a broad enough population to run a typical Macy’s.”
In addition, the demise of Stern’s means Macy’s East can continue experimenting with new formats, including furniture and bedding stores, and scaled-down Macy’s apparel stores, similar to the first one opened in West Palm Beach, Fla., last fall. Stern’s stores range from 50,000 square feet in Hampton Bays, N.Y., to 340,000 square feet in Paramus. Most Stern’s stores are 150,000 to 250,000 square feet.
In a statement, James M. Zimmerman, Federated’s chairman and ceo, said: “We believe the best approach for Federated in the Northeast over the longer term is to concentrate on our two strongest department store brands there, Macy’s and Bloomingdale’s. We think both our customers and our shareholders will be better served this way.”
He added that the strategy is expected to improve both cash flow and return on investment, while still enabling Federated to achieve its targeted earnings per share of $4 to $4.25 in 2001, exclusive of one-time charges due to the conversion.
“Although this is a move that we believe will benefit the most people over time, it still was not an easy decision to reach,” Zimmerman said. “An excellent Stern’s organization sustained solid levels of performance in a very difficult, increasingly competitive retail environment, enabling Stern’s to outlast virtually all regional competitors in its middle-market niche,” including the recently-defunct Bradlees, as well as Hills, Caldor and Jamesway over the years.
“Were it not for the unique opportunity Federated has to consolidate our presence in the greater New York area and to further leverage our Macy’s and Bloomingdale’s nameplates, we would have continued pursuing the Stern’s strategy successfully in these markets for some time to come.”
Stern’s in Willowbrook and Bridgewater, N.J., are scheduled to close by midyear and reopen as Bloomingdale’s in 2002, following major renovations expected to take about 18 months. With theses additions, Bloomingdale’s will operate 26 stores in 10 states, and have annual sales exceeding $1.8 billion.
Former Stern’s becoming Macy’s East stores will operate through the transition, with remodeling occurring gradually over several years. Following the conversion, Macy’s East will operate 107 stores in 15 Eastern states and Puerto Rico, with annual sales over $5 billion.
Macy’s is taking the Paramus, Wayne, South Plainfield, Ledgewood, South Brunswick, Jersey City, Woodbridge and West Orange, N.J. sites, as well as the Yonkers, Commack, Hicksville, Hampton Bays, Flushing and Douglaston, N.Y., sites.
Also, Stern’s in Toms River, N.J; Atlantic Terminal, Brooklyn, and Bay Shore, N.Y., will convert to Macy’s, but might eventually close depending on negotiations with landlords. The five Stern’s closing and expected to be sold are in Massapequa, Lake Grove, Garden City, and Valley Stream, N.Y., and Monmouth, N.J. Macy’s already operates units in those locations. These stores and the two Stern’s converting to Bloomingdale’s will close in August, following going-out-of-business sales starting in May.
Stern’s is also closing its store in Manhattan Mall. The store is staging a GOB sale currently and is expected to be converted to specialty store and office space by the landlord.
Ron Klein, Stern’s chairman, and James N. Andress, president, will help in the store conversions and are expected to be reassigned within Federated.
Closing Stern’s will result in one-time costs of $130 million to $150 million, largely due to severances, recorded by the end of fiscal 2001. The company said as much as half of the costs will be covered by proceeds from the sale of Stern’s real estate. Sears, Target and Kohl’s are seen as possible bidders.
Federated has a capital budget, estimated in 2001 at $850 million, and $950 million annually thereafter. Funds to renovate former Stern’s sites will be taken from the budget. The $18.4 billion Federated operates more than 400 department stores in 33 states and Puerto Rico. Aside from Bloomingdale’s, Stern’s and Macy’s, the company has The Bon Marche, Burdines, Goldsmith’s, Lazarus and Rich’s nameplates. The retailer also operates Bloomingdale’s By Mail, Macy’s By Mail, macys.com and bloomingdales.com, and Fingerhut direct operation.
Asked if other store divisions could be consolidated, Carol Sanger, vice president of corporate communications and external affairs, said, “No. That’s not our plan. This is something that makes sense in the Northeast region, the home market for Macy’s and Bloomingdale’s, our two strongest brands there. We’re going with our strengths.”
Speculation involving other big consolidations, such as combining The Bon into Macy’s West, has been around since the early Nineties. But Sanger said, “It is not something that is under consideration.”
Federated is still considering selling off its troubled Fingerhut division, and is downsizing it in an attempt to improve its performance.
Asked if the Stern’s consolidation was a response to the influx of new competition in the region, Sanger said, “Not really. Obviously, Kohl’s has had some impact, but not as much as anticipated. Stern’s performed very well against Kohl’s. It’s biggest competitor is Macy’s, not Kohl’s. That’s why the consolidation makes so much sense.”
She added that Federated’s business in the Northeast “compared to the rest of the country is going pretty well, although the higher fuel prices and [softening] economy has had a depressing effect on retail overall.”
Sanger acknowledged that Federated, by closing Stern’s, could lose some volume in the short term, but in the long run will get it back and then some. “There is a lot of loyalty to Stern’s and department store nameplates. They have long histories. You don’t find that in discounters and specialty stores. But at the same time, a lot of the same Stern’s customers also know Macy’s. Stores that will convert will benefit by those shoppers. And customers will benefit because Macy’s carries private brands [such as Charter Club and INC] that Stern’s did not.”
Retail analyst Walter Loeb pointed out that Federated initially tried to make Stern’s into a Kohl’s-type operation. “They tried to distinguish it from department stores, but never really got it off the ground. It lost share to Macy’s and it will make more sense to Stern’s customers if they are served directly by Macy’s and Bloomingdale’s. This is an attempt to be more focused and have fewer companies speaking to customers and get more mileage out of them. Competition has become fierce in the area.”