Monday, March 11, 2002

High marks, new challenges for Federated after bankruptcy

Associated Press Writer

        CINCINNATI — Federated Department Stores Inc.'s return from bankruptcy has earned high marks from Wall Street, and the company now faces the same challenges that threaten the entire retail industry.

        “From the point that they came out of bankruptcy to today, there's never been an issue about how well they run their department store operation,” said Bruce Missett of Morgan Stanley Dean Witter.

        In the decade since emerging from Chapter 11, Federated has acquired the high-profile Macy's and Bloomingdale's chains, has more than doubled its stock value and has become the nation's leading department store group with $15.7 billion in annual sales.

        But as same-store sales decline and more shoppers turn to discounters, traditional department stores are struggling to maintain the bottom line.

        “Federated is arguably the best department store chain in a dying channel of retailing,” said Burt Flickinger III, managing director of Reach Marketing, a Westport, Conn.-based retail consultant.

        “While Federated still has a strong balance sheet, the negative same-store sales in department stores and specialty stores are very indicative of tougher times ahead,” Flickinger said. “Federated, like all the department stores, is hurt by the casualization of America. There's just too many khakis and sweaters in people's drawers and closets.”

        Federated operates more than 450 stores in 34 states, Guam and Puerto Rico, along with and Bloomingdale's By Mail.

        The May Department Stores Co., with $14.4 billion in annual sales, is Federated's biggest competitor among traditional department stores. The St. Louis-based company's chains include Lord & Taylor, Kaufmann's and David's Bridal.

        Both groups are dwarfed by Wal-Mart, which had sales of nearly $220 billion last year.

        Generations of high-end shoppers across the country have grown up with a Federated affiliate. Chains that are or have been part of Federated include Abraham & Straus and Stern's in New York and New Jersey, Jordan Marsh and Filene's in Boston, Rich's in Atlanta, Goldsmith's in Memphis, The Bon Marche in Seattle, Burdines in Miami, Bullock's and Broadway stores in Los Angeles, I. Magnin in San Francisco, Joseph Horne in Pittsburgh, and Shillito's, Rike's and Lazarus in Ohio.

        When Federated sought U.S. Bankruptcy Court protection in 1990, it was the largest retail bankruptcy in America and remained so until Kmart's recent filing. Federated had $9.1 billion in assets then, compared with Kmart's nearly $16.3 billion.

        “This company engineered one of the most brilliant uses of bankruptcy to build the company with major franchises, each ready for a fresh start, under the bankruptcy proceedings,” said Bernard Sosnick of Fahnestock & Co. in New York.

        Federated has refined the businesses, reduced operating costs and improved merchandising with private brands, he said.

        Canadian businessman Robert Campeau's retail ambitions pushed Federated into bankruptcy. His Campeau Corp. borrowed nearly $3.6 billion to buy Allied Stores in 1986, then borrowed nearly $6.6 billion to buy Federated in 1988. The company sank under the burden.

        Two years and one month after filing for Chapter 11, the combined Allied and Federated shed some of its divisions and emerged under the Federated name.

        “We had every confidence that the business was sound and healthy, so we knew that given the chance to reorganize and emerge as a public company again, we would succeed,” Federated spokeswoman Carol Sanger said.

        Federated's biggest misstep has been its 1999 acquisition of Fingerhut, a Minnesota-based Internet retailer.

        “They wanted to grow faster than they could grow their department store business,” Missett said.

        Federated bought Fingerhut for $1.7 billion to jump-start its direct-to-customer sales, but the deal soured when bad-debt problems grew among Fingerhut's customers.

        Federated reported Fingerhut as a discontinued operation and took a $770 million after-tax loss in fiscal 2001. The company hopes to recoup up to $1.3 billion in the next four years by selling some Fingerhut components and assets, and has acknowledged one bidder who would keep Fingerhut intact.

        Federated expects its and ventures to break even in 2003, and is moving into Internet home mortgages, investments and insurance through its FDS Bank, Sanger said.

        But Federated is dogged by high real estate costs at its downtown and mall anchor stores, and by the shift by upscale shoppers to discounters and mid-level retailers who often sell the same goods at cheaper prices.

        “Consumers have just not had the disposable income to spend in full-price, full-service department stores,” Flickinger said.

        Federated plans to expand its private-label lines, which accounted for about 5 percent of business in 1994 when Federated acquired Macy's, Sanger said. Private labels have grown to 16 to 17 percent of today's mix and are targeted to reach 20 percent.

        “You can do some things that will increase your top-line sales growth, but to really be able to be successful longer term, we think you need to continue growing through acquisitions as well as through strategies that extend your existing base,” Sanger said.


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