After two years of humdrum holiday sales, apparel retailers see encouraging signs that this season will be different. No one is counting on strong demand for winter garb and gifts more than embattled department stores, which had their worst financial results ever during the economic doldrums of the last few years. Even before that, apparel-focused department stores were losing market share to highly focused specialty retailers -- think Abercrombie & Fitch (ANF ) and discounters like Target (TGT -- which has become known for good apparel offerings.
To many analysts, Federated Department Stores (FD ), which boasts Macy's and Bloomingdale's as its flagship chains, stands the best chance of turning things around. Ratings by First Call analysts have been getting more positive since the summer, and several more retail analysts have begun covering the $15 billion company. The New York City-based retailer has kept capital spending at about $600 million annually for the last several years, most of which is spent on efforts to draw shoppers back to its stores.
Terry Lundgren, appointed to Federated's top spot in February, admits that more than a weak economy has been working against his stores. "The proliferation of retail options has covered all of our markets," he says. "You see rapid expansion at off-the-mall, big-box stores in record numbers." His plan is to position Federated's chains as the fashion-conscious woman's clear alternative to discounters. Making this happen, he says, requires rethinking just about every aspect of the business: store presentation, real estate, pricing, merchandise, and service.
Monthly sales growth at stores open at least a year -- a key measure of retailing health -- has been mostly negative this year, but some colder-than-usual weather and rising income for workers should start to make a difference. September comparable-store sales rose 3.2%, and October could very well be another positive month. Says Lundgren: "If the consumer stays on this track, [fashion-focused] stores like ours will benefit."
He points out that career clothes have been on the downslide for more than two years, but this spring, shoppers started to buy more business attire. He expects that trend to continue in the fall and winter months. "We're a natural recipient for that business," Lundgren says. "When you have to buy career apparel, do you buy it at Wal-Mart?" Lundgren spoke with BusinessWeek Online reporter Amy Tsao on Oct. 17 about Federated's turnaround efforts. Edited excerpts from their conversation follow:
Q: It has been surprising to see investors getting excited about department stores again. Your stock is up 84% since March. What's driving that?
A:We're trying to reinvent the shopping experience at our department stores. Over the next two years, we'll [make changes to] three-quarters of our stores.
One major thing is the fitting rooms. We've taken corners of the store and put in blocks of 12 or 15 fitting rooms and are servicing them [better]. We're putting a seating area outside with a cable-TV set so that [a shopper's] kids can watch cartoons, or her husband or significant other can watch the game while she's in the fitting room. We know the average sale grows the longer she spends inside our fitting room.
Second, the [signage] in our stores has changed dramatically. We used to have a menu at the top of the escalator. Now you'll see signs that are as large as street signs, and they will direct you. We've also put in price-check machines. You simply scan the UPC ticket, and the unit will tell you if [the item] is on sale, the regular price, the sale price, and how much you saved.
All of these techniques [are aimed at] simplifying the shopping experience, making it easier for customers to get around our stores, [and to make the experience more appealing].
Q: Are these changes enough?
A:We think we're on the right track. We're getting credit for having ideas that aren't being executed by others. We don't think the answer is to go back and do what we've done in the past. This is our list of ideas today, but we'll continue to search for new ideas that might take us to that next level.
Q: It sounds like you're expecting to see some benefit from these changes as soon as this year and next.
A:Clearly, in our case anyway, the consumer is starting to show signs of confidence and starting to open up the purse strings on discretionary, fashionable apparel.
As we come out of two years of [consumers shopping mainly] for basics, there isn't that fashion component in [a woman's] closet. This is the opportunity for a store like ours -- which caters to this fashion-oriented consumer -- to satisfy that need. As the economy begins to improve, [Macy's and Bloomingdale's] are the logical recipients of her increased discretionary income.
Q: How are you shifting real estate assets?
A:We have opened up freestanding stores [that are not attached to malls]. We have a store in a strip mall. We've tried smaller-scale stores, vs. our usual size of closer to 200,000 square feet. The one that has been perhaps the most interesting -- at least we've been able to read [it] thus far as a good idea -- is the freestanding, home-furnishings stores.
Q: Do you see a move away from mall-based stores?
A:We have over 400 department stores that are in the malls. For us to be truly successful, we must make the mall-based department store work. That has to grow, ultimately, in the range of 2% to 3% [a year] on a consistent basis. When that happens, we will throw off a tremendous amount of cash which gives us lots of options.
Q: What product-sourcing changes are you making? Are you buying more from China?
A:We source in many countries around the world. There certainly is momentum for increasing sourcing in China. That applies to us and every other retailer. About 16% of our total business is private brands that we make ourselves. About half of that is made in China. [Those figures are up considerably] since 1994.
Q: Consumers got accustomed to saving money by using coupons and waiting for promotions. Will you continue to use those techniques to drive traffic?
A:We've reduced the coupons we use by 20%. We'll still have them, but we will just have fewer of them. It's still a very important part of Macy's business -- less so for Bloomingdale's. We want to make these promos more special.
Q: So how do you drive traffic if you're doing fewer promotions?
A:One of my goals is to simplify our pricing. Close to 10% of our [merchandise] within the next 18 months will be priced at an everyday low price. That's relatively new for us -- today it's about 2%.
What we're talking about is instead of putting an item on sale six months out of the year, we'll offer it at a lower price every day. For example, we sold the KitchenAid stand mixer for $319.99 full price -- less on sale and during promotions -- and now we just sell it at $249.98 every day.
Q: Doesn't this pricing tactic work against your broader goal of reaching more higher-end shoppers?
A:We learned from our research that customers do expect some degree of product at a nonpromoted price. We're only talking about 10% of merchandise across many departments. This won't change the quality of product [that we sell]. It's a strategy to carry good, better, best offerings in every category. The ratio of better and best sold should go up, and the amount of good should decrease.
Q: What about changes in merchandising?
A:We're moving aggressively toward differentiating our assortments. The best parts of our business today are private-brand products or brands that are limited in distribution. We have a $2.5 billion private-brand business -- under the names of INC and Alfani and Charter Club -- that is working quite well.
And this spring, we're launching a new Tommy Hilfiger collection, called H, that will only be sold at Federated stores. Relationships like that are going to expand our plan of differentiating our assortments.
Q: How have you prepared for the holiday season?
A:This is a business that's very difficult to predict, but particularly so after two years of challenging times. We don't believe that this is a time to roll the dice and to load up the stores with inventory. It's a time for us to be smart, to be aggressively pursuing those ideas that are working well, and at the same time pare back on those categories that are less strong.
Q: So where do you see the company three to five years from now?
A:I see us positioned slightly higher-end than we are today. It will still be a balance of promotion. I see us having a larger percent of our assortment being sold exclusively in our stores. We'll have more differentiated product, more new product, and we will continue to edit down our selection.
I see our stores being more interesting. In three to five years we should be firing on all cylinders in all of these subjects.
Edited by Patricia O'Connell