Federated-May merger bets on dept. stores

updated 4:30 p.m. ET Feb. 28, 2005

CINCINNATI - Federated Department Stores Inc. plans to double its size by acquiring May Department Stores Co. in what amounts to an $11 billion bet that department stores have a future even as consumers increasingly shop at discounters and specialty stores.

“We believe passionately that department stores have a very important place in the ever-forming, ever-changing retail environment,” Terry J. Lundgren, Federated’s chairman, president and chief executive said Monday in announcing the cash-and-stock deal.

Many of May’s department stores eventually will be converted to the Macy’s name as Federated accelerates its strategy of creating a nationwide brand that would give it pricing leverage with suppliers. The transaction also would bring together the operator of Bloomingdale’s with May’s Marshall Field’s, Lord & Taylor and Hecht’s chains.

Federated would not say how many jobs will be cut or what the company would do in cases where it would control multiple department stores in malls. Analysts at Smith Barney estimates that 94 malls have stores with Federated and May nameplates.

The company wants to hear what regulators say about whether and how many of the overlapping stores will have to be closed or sold, Lundgren said at a news conference in New York.

The combined company would have about 950 department stores and an additional 700 bridal and formal wear stores. It would operate in every state except Alaska, along with Guam, Puerto Rico and the District of Columbia.

Finding a younger crowd
Department stores have been losing sales in part because young people regard them as the places where their parents shopped, retail industry analyst Kurt Barnard said.

He said Lundgren has driven Federated to reach out to young people with merchandise that appeals to them, an approach that Federated can use for May’s stores.

“It is working,” Barnard, the president of Barnard’s Retail Consulting Group, said from Nutley, N.J. “We are seeing younger people flocking to the (Federated) department stores.”

Still, Federated could face a big challenge in revitalizing May, whose sales have slipped, according to Bob Buchanan, an analyst with A.G. Edwards & Sons Inc. “It is not going to be easy to turn that around,” he said.

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