Prudence On 34 Th Street

Way back in February, 1991, R.H. Macy announced that it would put an unprecedented $150 million into television advertising in 1992. Given Macy's staggering debt load and deteriorating sales, the spending seemed outrageous. Never mind, said Edward S. Finkelstein, Macy's CEO at the time. "There's absolutely no reason for any reasonable person to worry about our financial obligations."

Sometimes, unreasonable folks are right on the money. By 1992, Macy's was in bankruptcy and Finkelstein was out of a job. Now, Macy's Co-Chief Executives Myron E. Ullman III and Mark S. Handler, atoning for their former boss's extravagance, promise such inflated promises are behind them. On Nov. 5, they unveiled a five-year business plan that they hope will relieve their creditors' anxiety about Macy's future. "We're not predicting 10% sales growth and margins improving two points," says Ullman. "Our plan is realistic."

NO SPIKE. The plan, released to Macy's creditors' legal and financial advisers, predicts sluggish sales in 1993 and doesn't expect cash flows to return to the heady levels of the late 1980s until 1998 (charts). The figures seem conservative, but many Macy's watchers remain cautious, given Macy's recent, dreadful performance. In its fiscal year ended Aug. 1, the retailer recorded a $1.3 billion loss on sales of $6.4 billion. Sales fell 3.7% at stores open a year or more. In September, when back-to-school business usually means a spike in receipts, sales dropped 4.7%.

Ullman and Handler say their plan will fix the chain's problems. Among its main components: slashing Macy's ad budget from over 4% of sales to under 3%. That will help cut operating expenses from 37.2% of sales in fiscal 1992 to 32% by 1998. There will be fewer one-day sales and more-focused promotions: Frequent credit-card users will get more direct-mail promotions than other shoppers.

Inside the stores, Macy's will continue to stock a wide assortment of merchandise but will scale back on private-label goods. Customer service will be bolstered in such departments as designer apparel and luggage and cut back in such areas as junior sportswear. Meanwhile, a computer program developed by rival Federated Department Stores Inc. and a new inventory-management system will let the chain stock and distribute merchandise more efficiently.

None of this is revolutionary: Dillard's and Federated have had such systems in place for years. But to survive, Macy's must play catch-up. "It doesn't throw anyone for a loop, but it works," says Bud Konheim, CEO of Nicole Miller, a Macy's women's-wear supplier. But some Macy's observers say it isn't enough. "You can't build a great business by cutting inventories, and that seems to be their main thrust," says one major supplier who sits on a creditors' committee. "The Eastern division is tightly managed, but the Western division is not. Their problems are monumental."

Still, says one board adviser, "they're trying as hard as they can. Ullman has credibility with me." Even Macy's banks continue to be patient: Chemical Bank and Bankers Trust New York Corp., which lead the bank group that holds Macy's $600 million in bankruptcy financing, have lightened Macy's covenants. Now, Macy's needs to produce just $42 million in cash flow for the nine months ending Oct. 31, 1993, instead of the $143.5 million that the covenants originally required.

But many pundits refuse to bank on Macy's future. "I used to love Macy's, it was my favorite place to shop," says Meredith Adler, a high-yield analyst at First Boston. This fall she abandoned Macy's and went to Lord & Taylor.

Convincing shoppers such as Adler to revisit Macy's won't be easy. "This has been a very painful exercise," says Ullman. "We've trailed the industry. But we're trying to return to a leadership position." If the plan works, Macy's, like the Dracula mannequins in its flagship New York store windows, may have its chance to rise from the dead.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE