• Jennifer Marks

Fed Reckons Outcome of May Merger

Cincinnati — Federated's private label brands will be headed into May Company stores in July and August, putting them in place in time for the September rebranding of most former May department stores as Macy's.

It's been five months since Federated acquired its one-time rival, and in addition to converting approximately 400 May units to Federated nameplates — mostly Macy's — the company is ready to start shaking up May assortments, according to Karen Hoguet, chief financial officer.

“In so many locations and in so many families of business, we believe that May has been undershooting their customer,” she said during an analyst call last week. “There is a lot of opportunity to raise the average unit retail in many families of business and provide merchandise offerings that are suited to our customers, story by store.”

In addition to tailoring merchandise assortments to better reflect local demographics and tastes, Federated plans to inject into the former May stores more differentiated merchandise at all price points, she said.

In the coming weeks, 68 stores will go into clearance mode and out of reported sales by the beginning of Federated's next fiscal year. Another eight will close later in 2006 and eight more thereafter.

Over the next three years, May units will also adopt the four core elements of Federated's “reinvent” program: price checkers, shopping buggies, improved signage and enhanced fitting rooms. By September, 45 stores will have the elements in place, with the remainder taking place over the next three years.

Federated expects to take $200 million to $225 million in markdowns from discontinued inventory — or roughly a quarter of the $1 billion in integration costs the retailer anticipates during the next three years.

The company expects after-tax proceeds of $400 million to $500 million from the sale of duplicate stores. The sale of credit card receivables should ring up approximately $1.9 billion, according to a company report. Federated hasn't yet estimated proceeds from the sale of May's group of bridal stores or Lord & Taylor division. Both transactions are expected to close by the end of the year.

The company also plans to shutter five of the 31 distribution centers it now operates in the aftermath of its acquisition of May Company.

In June, Federated will close facilities in Manchester, Conn. and Baltimore. In August, DCs will go dark in Aurora, Colo.; Portland, Ore.; and Salt Lake City. The initiative will eliminate 1.6 million square feet of warehouse space.

Last week, the company projected a loss of 5 cents to 15 cents per share for the first quarter of 2006 and sales of $5.75 billion to $6 billion. It expects a profit between 44 cents and 55 cents per share in the second quarter, as well as a full year profit for 2006 of $3.45 to $3.70 per share — excluding integration costs and a gain from the sales of credit receivables.

By 2008-2009, Federated's EBITDA as a percentage of sales is expected to return to the range of 14% to 15%, Hoguet said. That figure is comparable to historic peaks achieved by both Federated and May Company in 1999, when adjusted for the impact of the sale of credit portfolios.

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