May's High-Price Shopping Spree

It says buying Marshall Field's will spur growth, but the $3.24 billion deal is giving analysts sticker shock

By Robert Berner

The department-store industry has been losing market share to other types of retailers for more than a decade. And as the No. 2 player, May Department Co. (MAY ) has struggled more than leader Federated Department Stores (FED ). So it was no big surprise that on June 10 May, eager to drive growth, won the bidding war to acquire the 62-store Marshall Field's chain. But the price -- $3.24 billion -- astonished analysts, some of whom are questioning if May might have overpaid.

May will acquire the department-store division from Target (TGT ), which put the unit up for sale earlier this year to focus on its Target Stores discount division. In addition, May will get three distribution centers, $600 million in Marshall Field's credit-card receivables, and nine Minneapolis-area Mervyn's stores (Mervyn's is a 266-store chain that Target is considering selling).


  The sale is clearly a big win for Target. Merrill Lynch (MER ) analyst Stacy Turnof says most analysts were expecting a price of $1.8 billion to $2.2 billion. She said the May's offer works out to 14 times earnings before interest, taxes, depreciation, and amortization (EBITDA), well above the average 8.4 multiple that department stores usually trade at.

Why May was willing to pay so much more is obvious. Although both it and Federated have had weak sales at stores open at least a year, May's have been weaker. As the economy has picked up this year, May's same-store sales (those for stores open at least one year) rose just 1.7% for the first fiscal quarter, vs. a 6.9% hike at Federated.

A key reason is that a greater percentage of May's 438 department stores -- which operate under the Lord & Taylor, Famous-Barr, and Robinsons-May names -- are middle-market stores, says Marshal Cohen, chief analyst at market research firm NPD Group. He points out that such stores have faced far more competition from discounters and the likes of Kohl's (KSS ) and a resurgent J.C. Penney (JCP ) than Federated, whose Macy's and particularly Bloomingdale's divisions target a higher-end customer. He suspects that's why May was willing to pay a premium to acquire Marshall Field's, which has a slightly higher-income shopper than May.


  Once the deal is complete, May will be neck-and-neck with Federated. Last fiscal year, May had sales of $13.4 billion, compared to Federated's $15.3 billion. Marshall Field's had sales of $2.58 billion. But buying Marshall Field's is not a sure-bet solution. Its stores, which are concentrated in Michigan, Illinois, and Minnesota, have struggled under Target's ownership.

While Marshall Field's same-store sales turned up for the first quarter, the increase hardly makes up for four years of declines. It had a pretax profit of just $107 million last year, down from $135 million from the year before. And most of that has come from finance income on its credit cards. Target management has pointed to Marshall Field's revitalized and remodeled flagship store on Chicago's State Street as a sign that the chain has turned the corner. But it's not clear if the revamping strategy will work at other stores, which are largely in suburban malls.

May's management says the deal should be additive to earnings next year. But A.G. Edwards analyst Robert Buchanan sees the acquisition shaving May's earnings per share by 7 cents this year and 8 cents in 2005. In a written report, he said he wished May had paid less for the "long-lagging" Marshall Field's business. The jury is out on whether May might someday find itself wishing the same.

Berner is a correspondent in BusinessWeek's Chicago Bureau

Edited by Patricia O'Connell

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