Federated's Slow Ride On The Up Escalator

Allen Questrom doesn't look like a man who has been to hell and back. Tall, slim, tan, and well-dressed, the top executive at Federated Department Stores Inc. epitomizes the soigne Seventh Avenue look. It complements the message that he is trying to impart to employees, suppliers, investors, and the press: After two years of the most complex and expensive bankruptcy ever seen in retailing, Federated emerged from Chapter 11 a full six months ago and is doing just fine, thank you. The new Federated, says Chairman and Chief Executive Questrom, "is on an incline, not a decline."

True, Federated seems to be climbing out of its hole. For the six months ending Aug. 1, operating earnings from the seven Federated chains, including Bloomingdale's, A&S/Jordan Marsh, Burdines, and Rich's, rose 115%, to $107.5 million, on flat sales of $3 billion. But Questrom vows he can raise Federated's profits to the levels of rivals Dillard Department Stores Inc. and May Department Stores Co.--and that will be a far steeper climb. Federated's estimated 1992 cash flow is 8.3% of sales, compared with 12.1% for Dillard's and 13.3% for May. To hit Dillard's-style cash flow, Federated would need to boost sales to $200 a square foot from the current estimated level of $150.

NOT BULLET-PROOF. If the arithmetic is against Federated, so is geography. Roughly 40% of sales come from stores scattered through the Northeast, a region packed with discount chains, outlet malls, and competing department stores. It also has some of the country's highest rent and labor costs--plus a large pool of unemployed, wallet-clutching consumers. "Federated's future is linked to the health of the Northeast," says Alan Millstein, a retail consultant in New York. "Even with the outstanding talent they might have, the company can't overcome the realities of unemployment."

No wonder even bullish followers of Federated sound a cautionary note. "This is not a bullet-proof story," says Michael Exstein, an analyst at County NatWest Securities USA. What encourages Exstein and others, though, is that Questrom and James M. Zimmerman, the operating chief, have established a strategy of improving efficiency and sharing merchandising knowhow throughout Federated--a big achievement at a company that for years had lacked a well-executed plan of attack.

Four of Federated's chains--Rich's in the South, Burdines in Florida, Lazarus in the Midwest, and Bon Marche in the Northwest--have healthy operating margins and are the dominant stores in their markets. In areas where Federated's position needed shoring up, Questrom has been closing stores and cutting back. A&S in Brooklyn, N.Y., and Boston's Jordan Marsh merged their headquarters and backroom operations in March, a move that will save some $25 million annually. In Florida, Burdines combined with Jordan Marsh and Maas Brothers, laid off 1,500 employees, and achieved annual savings of $30 million. Questrom also lopped off almost $950 million in debt by issuing new stock in May. Long-term debt is now $2.2 billion, well below the $7.5 billion burden that pushed it into Chapter 11.

FAIR EXCHANGE. Important as cutting costs and debt is, boosting sales is even more vital, and that calls for a cross-pollination of profitable ideas among the stores. A computer system that was developed by Rich's to track inventories and sales is being installed in all chains. And top executives from each division now visit each other to trade cost-saving ideas and selling techniques. That's a marked departure from prebankruptcy days, when the chains' views toward each other were more competitive than cooperative.

Take the recent exchange between Lazarus and Bon Marche, also known as The Bon. Lazarus developed a young men's department called Sports Forum, which sold clothes with sports insignia in a space packed with TVs showing sports videos. Eight months ago, The Bon adapted Sports Forum to the Seattle market. "We got a tremendous pop out of it," says Robert DiNicola, Bon Marche's president. "We don't have this attitude that 'just because it's not my idea, I don't want to try it.' "

Bloomingdale's is similarly trying to incorporate techniques originated at Nordstrom Inc. and Burdines. At Burdines, a "preselling" program has salespeople keeping lists of customers to call about promotions and new items. Bloomingdale's disdained such tactics when it was the undisputed mecca for style. "In the Seventies and Eighties, people flocked to the store," says Barry Bien, a salesman at Bloomingdale's in White Plains, N.Y. "We were just clerks writing up business."

But with bankruptcy distracting management and spooking suppliers, Bloomies' merchandise came to seem pricey but ordinary, and sales stagnated. Michael Gould, who became CEO of Bloomingdale's in August, 1991, has been retraining salespeople and offering extras that customers remember: changing tables for babies in both men's and women's rooms, free coffee, and exit interviews to see what shoppers think. And Bien now has the names of 200 customers who have agreed to let him call--sometimes just to schmooze. "I must make 10 phone calls a day," says Bien. The result? "My business has improved 30%." Bloomingdale's business seems to have gotten a lift, too. "Even problem spots like the Chicago store that were losing substantial amounts of money two years ago may have broken even last year," says Exstein.

Still, some of Federated's efforts at rejuvenation have rattled shoppers and salespeople. At the Coral Springs Mall in Florida, there are now two Burdines stores--one of them a former Jordan Marsh. Dottie Shifflet, a sales specialist in the infant department at the old Jordan Marsh, has noticed two trends: The Burdines at the other end of the mall gets a wider range of sophisticated brands. "We feel like the stepchild," say Shifflet. Meanwhile, customers loyal to the old Jordan Marsh drifted elsewhere, put off by the name change. Only now are they slowly coming back again.

STOCK STORY. Wooing customers isn't Federated's only challenge: It has to keep romancing investors as well. To emerge from bankruptcy in February, Federated wiped out $5 billion in old obligations by issuing new notes and some 80 million new shares of stock to its creditors. In February, 20 million of those shares started trading immediately at 17 1/4. The remaining 60 million were restricted from trading for varying lengths of time after Federated made its public offering of 46 million shares in May. This November, creditors can start trading about half of the restricted stock. Creditors eager to reap some gain from their investment may rush to dump the newly unrestricted shares, pushing Federated stock, now trading at 13 3/4, into a rapid decline.

Questrom and Zimmerman say they are discussing with creditors how to stop a scary sell-off from happening. So far, those discussions haven't been made public. But the health of Federated's stock and the confidence of investors ultimately depends on how much Questrom's reforms can improve Federated's basic retail business. After toughing it out for the past two years, Questrom likes his prospects. "People said we only had a 1-in-10 chance of coming out of bankruptcy," he says. "We beat tremendous odds." Handicapping the odds at the postbankruptcy Federated will be one of Wall Street's--and Seventh Avenue's--favorite activities this fall.

      1991 sales $1.4 billion, 35 stores. Two chains now operate as one division. 
      Northeast market means profit margins are slim
       $1.3 billion sales, 46 stores. 20 Jordan Marsh and Maas Brothers stores in 
      Florida were incorporated into chain, which faces increasing competition from 
      Dillard's in the sunshine state
       $1.1 billion sales, 15 stores. New CEO is working to jump-start sales at this 
      former fashion leader. While lackluster branch stores get special attention, 
      he's spending $35 million this year to make over the Manhattan flagship
       $935 million sales, 40 stores. Acquisitions have made it a major 
      department-store presence in the Midwest, with one of Federated's lowest cost 
       $818 million sales, 23 stores. Among Federated's most profitable chains, it is 
      benefiting from Macy's crumbling market share in Southeast
       $720.4 million sales, 39 stores. Dominates department-store business in 
      Northwest and remained highly profitable throughout bankruptcy
       $669 million sales, 22 stores. Highly promotional, moderately priced chain 
      enjoys healthy profit margins despite sluggish New York and New Jersey markets
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