FEDERATED, MAY, PENNEY’S SETTING OUT TO CAPTURE A YOUNGER MARKET

Byline: Jennifer Mann / Georgia Lee / Teresa F. Lindeman

NEW YORK — Performances at department stores for the past year have run the gamut, from Penney’s declining profits to Federated’s historic highs. But at Friday’s round of annual meetings, top brass at May Co., Federated and Penney’s all fessed up to the fact that they need to get more customers through their doors, and “get with it” with the selections.
It’s youth they’re after — the teens, tweens, juniors, post-grads embarking on careers, and newlyweds that more often shop hipper specialty stores. Federated is testing prototype junior shops, May Federated is testing prototype junior shops, May Co. wants its stores to be the destination for Generation Y, and Penney’s is broadening its youthful Arizona private label, one of the chain’s few successful brands, to new categories. Here’s more of what happened at the meetings.

Penney’s Question of Balance

Vanessa Castagna, chief operating officer and executive vice president of J.C. Penney Co. Inc., who is seen as the key to turning around the company’s core department store business, said the retailer needs to strike a better balance between private label brands and national brands.
Speaking at the chain’s annual meeting in Lenexa, Kan., Friday, Castagna offered a few solutions to Penney’s woes, which seemed only compounded by the chorus of shareholders criticizing management for letting Penney’s performance slip for years.
Of the half-dozen outspoken shareholders, the most emotional plea came from Gary Nystrom, a Penney’s employee and shareholder, who implored the board and top management to resign.
“Mr. Chairman, I am disappointed in you personally….You have a responsibility to protect our investment and you have failed. This company has gone from bad to worse in the biggest bull market we’ve ever had,” Nystrom said. “By the standards of Mr. Penney [the company’s founder], you should be standing up there in your underwear.
“I ask you and the entire board to resign,” Nystrom said, at times sobbing. Of the roughly 100 shareholders present, many applauded his fiery words.
James Oesterreicher, chairman and chief executive officer, replied that Nystrom was out of order. Oesterreicher has already announced plans to resign after a successor is found. Not every shareholder was critical. Rosalee Latino professed, “J.C. Penney has been very good to me and I know you can pull this out. I’m praying for J.C. Penney and for you,” meaning Oesterreicher.
After the meeting, Castagna, who joined Penney’s nine months ago from Wal-Mart Stores Inc., said she’s evaluating Penney’s women’s brands and is “in the middle of trying to understand how to balance them.” The meeting was held at a catalog fulfillment center near Kansas City.
Oesterreicher told shareholders the company has undertaken a massive and all-encompassing effort to rebuild its store merchandising process.
Much of the speculation on his successor has focused on Castagna, the second-highest official in the company, though insiders and outsiders are being considered. Castagna is new to Penney’s and has never run a company, though she has a strong track record and turned around the women’s business at Wal-Mart.
“We would not view this as a positive, because it will take all her time, energy and efforts to run the stores and catalogs to help stop the earnings slide and increase profitability,” said Wayne Hood, retail analyst, Prudential Securities. When and if Penney’s management can turn the company around, then it might be a good move to elevate Castagna, Hood said.
Castagna said the staff has worked hard to improve the look and offerings at the company’s 1,100 department stores. “This isn’t rocket science. Retailing is having the right merchandise at the right time, and we haven’t always been doing that,” Castagna said. “But we’re working on it.”
She said Penney’s customers are confused by the store — a situation caused by the retailer’s dictating styles to consumers. The company wants to let the customer dictate what to sell.
“We’re working at getting some of the layers out, working faster and with more innovation,” Castagna said, noting that the women’s apparel business has been doing pretty well, particularly with some national brands such as Liz Claiborne’s Crazy Horse and Evan Picone. The men’s business isn’t, she said, and the proper balance between private and national labels is missing.
“I know I keep coming back to this, but again, I would talk about that balance. I don’t think we’re giving the consumer enough choices, and that’s something we’ll be addressing. There needs to be more newness.”
Castagna said the company recently launched an Arizona bedding line aimed at the 8-to-14-year-old “tween” market. “That’s done very, very well, and we’re encouraged by the results,” Castagna said. Arizona is a well-known denim and sportswear private label for Penney’s.

Federated’s Focus On the Future

Federated Department Stores has a multipronged strategy to lure youth from the middle of the mall and back to the big anchor stores.
It includes the ongoing testing of several revamped juniors areas, primarily in California and Florida, the launch of the Green Dog tots-to-teens apparel and accessories private label brand this fall, and renewed efforts to recruit young talent.
Faced with an ongoing labor crunch, the company is banking on retailology.com — a Web site for recruitment of college students — along with new training initiatives to keep them.
Those strategies were outlined at the annual shareholders meeting held in Atlanta Friday, amid a mood of optimism set by James Zimmerman, chairman and ceo. While detailing the initiatives, Zimmerman also described 1999 as the “best year in memory,” for Federated. However, he cited recruiting and keeping employees as a major challenge, along with bringing excitement into department stores, which generally continue to be perceived by consumers as stagnant and stale.
In 1999, earnings per share grew 18 percent to $3.62. The compound annual growth rate exceeded 19 percent over the past five years, with EBITDA as a percentage of sales and as return on investment rising steadily over the past few years.
For 2000, the Federal Reserve Board’s recent interest rate hike should have a slight effect on performance, however. Zimmerman projected a 3 percent increase for comp-store sales for the remainder of the year, compared with a 4.5 percent total increase in 1999.
“The psychological impact of increased interest rates affects consumer spending,” said Zimmerman in a post-meeting interview. “Our biggest concern is that the Fed overshoots the mark and we end up with a hard landing in the 4th quarter.”
Federated also announced plans for a new 160,000-square-foot Rich’s store at the Mall of Stonecrest, east of Atlanta. Construction begins in August 2000 for a planned opening in fall 2001. Rich’s will also open a new store at the Mall of Georgia this fall that will emphasize the new format for juniors, and have a strong men’s area.
Zimmerman said that women’s apparel was a “difficult category” industry-wide in the first quarter, due primarily to weather issues, but he added that the past several weeks had shown improvements as the weather warmed.
“It will take another 60 days of watching women’s apparel to be definitive about performance,” he said. “We are up against a very strong performance last year, with good fashion trends.”
Terry Lundgren, president and chief merchandising officer, said that experiments with new concepts for juniors in West Coast and Florida stores had been promising. He stressed juniors as a key demographic group with rapidly growing spending power.
“The environment is key in juniors areas,” he said. Music for juniors areas is being updated, along with better sound systems, and even local DJs in some cases. Departments attract kids with food and drink or vending machines that dispense CDs.
As for junior assortments, Lundgren said, Federated is looking for new ideas in brands and in item-based strategies that emphasize trends such as denim or khaki, regardless of brand. He said the company is considering private label programs for juniors, but the chances of that are slim considering the fast pace of trends in juniors and the long lead times required with imported goods.
Federated is optimistic about the back-to-school launch of private label Green Dog for children’s clothing and accessories. Green Dog will replace some of the fragmented brands and labels currently offered and will offer a strong visual and marketing package, said Lundgren.
Overall, private label, which accounts for 15 percent of total sales, has been highly successful in women’s areas. Lundgren cited Federated’s INC sportswear brand and Alfani as strong performers.
When asked about status brands, Lundgren said, “Those companies that are updating with modern trends are doing well,” he said. “Those that continue with one look, one style, are not doing well.”
Federated is looking at several new women’s better sportswear lines for fall, including Kenneth Cole women’s lines, Nine West and Anne Klein’s reentry into the better zone.
First-quarter sales for Federated’s combined e-commerce businesses — Bloomingdales.com, Macy’s.com and Fingerhut.com, acquired last year — are $28 million, up 433 percent from last year, with $170 million projected for the year 2000.
Ron Tysoe, vice chairman, was introduced by Zimmerman as “Mr. Clicks.” Tysoe said all Federated divisions should be selling online within the next two years. Macy’s and Bloomingdale’s already do. In the near future, Federated will launch Web sites for certain divisions initially just for marketing, not selling.
Zimmerman said finding and keeping good employees was “the major issue.”
Federated’s new employment Web site, complete with streaming video and audio, has been a successful tool, generating over 18,000 online applications. A bigger challenge is retaining employees. Annual turnover rates of 60 percent in some stores must be addressed, he said.
“We’ve learned the key to keeping employees is not pay or commission, but in developing strong relationships with the department supervisor,” said Zimmerman. “People quit people, not companies.”
With decreasing employee turnover a major goal in all stores, Federated is offering week-long training programs for every store and department manager to develop stronger connections with sales personnel.
“We haven’t done enough on this issue in the past, and it’s the most important thing today in the running of our stores,” he said. “If we can keep people for a year, it works out. If they leave in 90 days, it’s hopeless.”

May Seeks New Comfort Level

May Department Stores Co. has a new team in place to examine casual workwear and the best ways to cater to women shopping the category, May Co. president and ceo Gene Kahn said in a press conference following the company’s annual meeting Friday in Pittsburgh.
May hasn’t quite figured it out. Kahn said sales of jackets have been hurting, and the company’s first-quarter results took a hit when capris failed to meet expectations.
But Kahn reminded his audience that May had a strong year in 1999, with record sales of $13.9 billion and net earnings of $927 million. Management hopes to continue producing strong sales this year, with more emphasis on growing the gift and home goods operations.
Kahn praised management’s efforts to attract younger customers, who he said now feel more comfortable in the company’s department stores.
Efforts to reach those customers could be bolstered by May’s first venture into online retail, an Internet bridal registry.
The project with WeddingNetwork.com, which was announced last month, is touted as meeting virtually every need of young brides and grooms.
“This will also help us establish that our stores are a home shopping destination for the Y Generation customer,” Kahn said.
May will continue to look at e-commerce ventures but doesn’t expect a rapid entry into that arena. Kahn said officials see the most potential for gifts and other merchandise that doesn’t require much sizing. They won’t rush in without good reason to expect a profit. “We think this is a long-term play, not a short-term opportunity.”
The company’s conservative Internet stance was one of the things criticized in a shareholder proposal voted on at the meeting. The proposal, submitted by the Union of Needletrades, Industrial and Textile Employees, called for eliminating May’s antitakeover provisions, which were installed several years ago without a shareholder vote. A majority of stockholders rejected the measure.
Stockholders were also displeased that the stock price has fallen from $43 last May to around $29. Kahn noted Wall Street has been backing away from the retail sector in general. “Management as well as the board are obviously concerned and feel that May’s stock price is terribly undervalued.”
A second proposal calling for all board members to be elected annually, rather than in staggered terms, had 52 percent of shareholders in favor. If that holds up in the final count, Kahn said the board will consider the idea.
A key to improving May’s performance on Wall Street will be boosting sales in stores open at least a year, he said.
While women’s apparel is still showing weakness, Kahn reported the men’s side has produced some bright spots. There’s been good response to shirts and pants in the new, more comfortable fabrics that feel casual but look professional.
In addition, he credited Regis Philbin for reviving interest in dress shirts and ties. “It has set a fashion trend,” said Kahn.
The gathering in Pittsburgh, headquarters of May’s Kaufmann’s division, was the first time in three decades the St. Louis-based retailer has left its hometown for the annual meeting. Shareholders had asked the company to go on the road.