Macy's and Hilfiger make a deal

Macy's is going to be the exclusive distributor for Tommy Hilfiger apparel.

Beginning in the fall of 2008, Mr. Hilfiger will restrict sales of his men’s and women’s sportswear lines — from hoodie sweaters to puffer coats — to Macy’s roughly 800 stores. The combined lines are estimated to have annual sales of at least $200 million.

It's becoming very hard to come up with a clear definition of "private label".

Is Macy's the next private equity play?

There's been some speculation lately that Macy's will be the next retailer to be scooped up by private equity purchasers.

Wall Street sources cited as likely bidders Kohlberg Kravis Roberts, the buyout firm famous for its takeover of RJR Nabisco in the 1980s; and Goldman Sachs Group, Macy's longtime investment banker.

Macy's would be a ripe takeover candidate because its rich cash flows and attractive real estate could be used to pay off debt that leveraged buyouts pile up.

There has even been speculation that Eddie Lampert (of Sears/Kmart fame) might make a play for another big retail name. Although he seems to have his hands full with the continuing bad news from his current possessions.

Some analysts see the whole scenario as unlikely:

"We view a Macy's LBO as possible but not probable," Deborah Weinswig, a New York-based analyst [for Citigroup], wrote in a report Tuesday.

"While there are a few reasons why an LBO might make sense for Macy's, especially given the slow progress of the May turnaround, we believe Macy's past LBO experience makes a transaction unlikely."

Macy's State Street business really, really bad

Macy's has admitted that Chicagoans, who were deeply PO'd by the decision to drop the Marshall Field's name, are staying away in droves from the venerable State Street location.

At a press conference after its annual meeting here Friday, Federated's chief financial officer, Karen Hoguet, said former Field's stores are performing no worse or better than the roughly 400 regional department stores Federated acquired from St. Louis-based May Department Stores Co. in 2005 and converted to Macy's.

But there is an exception: the Chicago store on State Street.

The landmark store, long a tourist destination, is "doing badly," Hoguet said, without providing specific performance data.

However:

Chairman and Chief Executive Terry Lundgren was quick to interject that operating a Midwest flagship in Chicago remains core to Macy's strategy.

"We're very committed to that store," said Lundgren, noting that rival Carson Pirie Scott a few blocks south closed its flagship store earlier this year. New owner Bon-Ton Stores decided the giant emporium was too costly to operate.

Overall, it looks like Macy's (the name change from Federated was finally made official yesterday) is not doing particularly well with the transition:

On Wednesday Lundgren characterized the former May stores' sales performance as "disappointing," as Federated missed its first-quarter sales target and earned less than Wall Street had expected.

Analysts estimate the sales drop at former May stores averaged 7 percent to 10 percent.

If the overall number is 7%-10% and State Street is worthy of particular mention, the sales drop there must be awful.

Macy's to newspaper biz: "Shape up!"

Well, okay, you caught me making up quotes again. The CMO at Macy's, Anne McDonald, didn't quite say that -- what she said was: "In order for your newspapers to be winning our advertising dollars, you need to be winning in the marketplace, and that's not currently the case." And:

With Macy's now a national brand following Federated's acquisition of May Department Stores, the chain is turning increasingly to media with a national reach such as fashion magazines, television and Web sites, she said.

Newspapers are still effective at delivering local messages, she said, but need to do more to engage Macy's shoppers — primarily women ages 18-54.

Department stores have always been a mainstay of the newspaper business, along with supermarkets and car dealers. Although I don't have any numbers in front of me, I would be willing to bet that those have been the three leading categories of local advertising.

But car dealers are going on-line -- the last few cars bought in the Houk household (my kids go through vehicles at a disturbing rate) were sourced through sites like cars.com and autotrader.com, and that's where the dealers and manufacturers are going as well. Supermarkets, as any vendor supplying trade promo funding can attest, are spending most of their money in-store these days. And the consolidation of the department store channel has pretty much butchered that cash cow.

McDonald did offer some suggestions. A couple:

• "newspapers [should] collaborate more effectively across regions and with each other in selling advertising, which would allow national companies such as Macy's to reach a broader audience"
• "publishers [should] collaborate with advertisers on research to better understand the rapidly evolving habits of their customers"

Most importantly, she suggested that the newspaper industry, like her business, just needs to wake up to the changes in the marketplace:

Macy's, she said, is seeking to establish itself as a more upscale, fashionable brand and drive foot traffic even when there aren't promotions, and is still trying to understand how customers are changing the ways they shop. "Like us, you must change the way you think," she said.

Frankly, I'm not convinced that Macy's has the answer to the problems of their channel (I'm not convinced that there is an answer). But I'll give them credit for being aware that they need to change. I've seen less evidence of that awareness among newspaper execs.

More at this site.

In related news: Macy's is moving ad spending, responding to poor sales:

Troubled by sluggish sales across all Macy's stores the last three months, parent Federated Department Stores said Wednesday that it will shift its advertising dollars to public promotions from direct mail and private customer-only events. "Our promotions will need to create more urgency for these customers to react," CFO Karen Hoguet said on an earnings call. "These marketing issues are particularly critical in home areas that tend to be driven most by promotional offerings. We are hoping that these changes will help accelerate the business starting in late May."

Good results from the other guys' marketing

J.C. Penney and Kohls reported good quarterly results:

Wal-Mart may be whimpering, and Federated Department Stores may be struggling. But both J.C. Penney and Kohl's Thursday announced better-than-expected third-quarter results, and bullish predictions about the quarter ahead.

Good for them. But the amusing part of the report was this:

The company also said J.C. Penney benefited from the extensive marketing campaign for Macy's stores, which sent more people shopping at the mall.

Impressive retail sales figures

I saw an article entitled "Federated's September sales beat expectations" and thought it was a good omen for that company (one I didn't expect), since September was the first month of the name-change of Federated stores.

If you read the article, though, and others (noted below) on other stores, Federated sales increases were poorer than almost all others major retailers -- retail generally had a great month.

Federated +6.2%
Target +6.7%
JC Penney +10.2%
Limited +12.0%
Wal-Mart +1.2%
Bon-Ton +9.1%
Nordstrom +13.0%
Saks +10.0%

Only Wal-Mart, in this grouping, did poorer than Federated. My observation (I don't have numbers to support it), is that the department store sector does reasonably well when the economy is strong, but sinks during weak economies -- and each down cycle over the past few decades has seen them sink to ever-lower levels.

So, although Federated may be looking like it's doing reasonably well at present, it needs to do better than this while the economy stays strong. (I admit to being a skeptic about department stores generally, and Federated in particular, so take my opinions with a grain of salt).

By the way, if those Wal-Mart numbers aren't an aberration, and if Wal-Mart US starts looking like Germany, Korea, Japan, and UK, then things could get ugly in Bentonville.

Macy's continues alienation campaign

Having already made enemies of most of the people in the nation's third-largest market, Federated Department Stores is now trying to see if they can make it unanimous.

Okay, that's probably not their intent, but it sure seems that way.

Macy's dealt a new blow Monday to Marshall Field's loyalists: Field's credit-card holders who cancel their new Macy's cards out of anger will be canceling their Field's accounts, too.

The new wrinkle came in a press release with information that had been unavailable last week, when Field's owner, Federated Department Stores, said Field's card users won't earn rewards points as of the end of the day July 31. Only Macy's cardholders may start accumulating rewards points Aug. 1.

I understand that the next step they're planning is to take any customers who mention the words "Marshall Fields" and subject them to the rack and thumbscrews. That'll make 'em love Macy's!

Lord & Taylor sold

Federated announced the sale of Lord & Taylor to a property development firm for $1.2b.

Federated said that its board has approved the sale to Purchase, N.Y.-based NRDC Equity Partners LLC, which is a partnership between principals of Apollo Real Estate Advisors L.P. and principals of National Realty & Development Corp.

Given the nature of the acquirers, this would appear on the surface to be a real estate play, and L&T occupies some good real estate. NRDC denies it:

NRDC said it plans to run Lord & Taylor as a specialty department store chain and to keep L&T's management team, including CEO Jane Elfers.

Well, they sorta deny it:

Richard Baker, president of NRDC Equity Partners, said in separate release that the acquisition of L&T "furthers "NRDC's strategy of acquiring great companies that have a strong brand and a valuable real estate platform."

"Lord & Taylor has been an iconic national brand for 180 years. We believe there is significant opportunity to continue the revitalization of the brand begun in 2003," Baker said.

So which is it? An "opportunity to continue the revitalization of the brand" or "a valuable real estate platform"?

I'll go with this sentence: "Analysts say the retailer's most valuable asset is its real estate, particularly its 10-story, 600,000-square-foot flagship store on Fifth Avenue." $1.2b looks like a bargain.

Effects of a name change

Federated Department Stores' decision to eliminate the names of local stores, replacing them with Macy's, may turn out to be a good plan in the long run. The idea is to create a national brand name, gaining effeciencies in advertising and merchandising.

In the short-term, however, the fallout has been negative. The Columbus Dispatch reports that eliminating the 150-year-old Lazarus name with Macy's has cut down on customer traffic.

In 2005, customer visits to Macy’s in the Columbus market declined 4.5 percentage points, or by more than 50,000 people, according to the independent marketresearch firm Scarborough Research.

The drop was steeper than Lazarus experienced during the previous five years combined.

Here in the Chicago area there is a strongly negative reaction to the elimination of the Marshall Fields name. How that will translate into traffic and sales will take time to see.

Update (Sunday): USA Today talks about Federated's plans in general, and comments on negative reaction to the name changes. It sounds like Federated's starting to get a bit testy on the subject:

Sosnick, like Lundgren, has grown weary of the naysayers: "Macy is a broad-line retailer that did $15 billion in business last year. People can say all these things, and it's true. You're not writing about nirvana, but it's a change and an improvement."

Federated choosing their brands

As Federated decides which brands will make it onto their shelves after the merger (hint: the May Company brands aren't winning many of the battles), some well-known names are losing a big piece of their distribution. Florsheim and Nunn Bush, two top shoe brands formerly carried at May stores, but not at Federated, are among the losers.

The article linked, from the Pittsburgh Post-Gazette, is a good overview of many of the issues involved in the merger -- there's more info than we can excerpt, so I suggest you read it.

Of particular interest is the info on brands reacting to the shrinking channel by opening their own stores (Jones and Liz Claiborne are mentioned). We've hit on the same point -- as retailers go more private label and as manufacturers open their own stores, there will eventually be little difference between them.

Tuesday quick notes

Federated settled with New York, paying $725,000 to resolve claims of false advertising and sales promotion. "Kaufmann's ... used small print in ads to exclude many items from sales, featured photos of items not eligible for sales, and used misleading in-store signage. It also created false senses of urgency to buy with such promotions as "Biggest Sale of the Year" and "One Day Only Super Sale," only to retain lower prices after the sales were supposed to end..."

Best Buy is reported to be looking to buy a piece of Five Star, a Chinese consumer electronics retailer. Best Buy had said they were entering China this year, and it appears they want to buy into Five Star as a way of creating a strategic alliance.

Hain is rolling out an organic baby formula product as part of its Earth's Best line of infant and children's foods. This is in line with the health trend we commented on here.

Macy's will emphasize private labels

Things have been tough for a while for manufacturers who rely on department stores as their principal channel. The channel's share has shrunk and the number of players has followed southward, to the point that it is almost a one-player channel -- Federated (aka, Macy's).

And for the manufacturer, it gets worse, in that Macy's is planning a survival strategy based on private label.

The strategy, detailed in a recent conference call with analysts, will involve the rollout of an estimated $2 billion worth of Macy's private labels to all May stores, as well as the introduction of some of May's brands to Macy's stores.

Further on, after discussing Federated's plan to "reinvent" the department store, the article adds:

The single most important factor of reinvent is Federated's merchandise, an increasing amount of which is one-of-a-kind. About one-third of Macy's 2004 sales of $13.6 billion was generated from merchandise that is exclusive or of limited distribution. That's up from about 25 percent in 2003.

Private label goods, such as INC, Alfani and Charter Club, make up 18 percent of that figure, or $2.3 billion. The balance is exclusive merchandise provided by national vendors such as Tommy Hilfiger.

By adding the May stores, Federated expects in the next year or two to nearly double sales of its private labels and to increase their percentage of total sales to 20 percent.

I tend to be very skeptical of fine-sounding but vague words and phrases like "reinvent". And as an alumnus of the department store biz, I tend to be skeptical of everything they do and say. But I can certainly agree that if there ever was a channel that needed reinventing, they're it.