California Apparel News

Macy’s Inc. can deliver star power, but can it deliver on its promise? For glitz, the better department-store chain produced the aptly named Macy’s Passport Gala Evening on Sept. 27. It’s where film legend Liz Taylor greeted an estimated 2,000 people at a Santa Monica, Calif.–based fashion show to raise funds for HIV/AIDS research.

On Sept. 16, celebrities including Donald Trump, Martha Stewart and Jessica Simpson fussed about their branded products at a Macy’s store during a 90-second commercial aired during the broadcast of the 59th Primetime Emmys show.

Behind the glitz, the United States’ largest department-store chain is struggling to realize the ambitious promise made by Chief Executive Terry Lundgren in 2005. He made a gambit to build a nationwide department-store brand where America shops for fashion and homewares.

The executive’s dream rode on the wave of a gargantuan merger with the May Co., which was completed on Aug. 30, 2005. The chain, then called Federated Department Stores, grew by 400 stores during the merger, thereby doubling its size to more than 800 locations across the United States.

After the big news of putting the Macy’s nameplate on Robinson-May stores and popular regional stores such as Marshall Fields in Chicago, the company is engaged in the hard work to realize Lundgren’s gambit: creating a nationwide brand of what it has called “affordable-luxury” stores.

Macy’s Inc. also owns upscale department store Bloomingdale’s, with 39 locations and 2006 sales of more than $2 billion. Another Macy’s property is e-commerce retailer Macys.com, which earned $620 million in 2006. It is forecast to earn more than $1 billion in 2008, according to the company’s Web site.

The retailer’s digestion of the May Co. merger is still a work in progress. In its second quarter of 2007, which was reported on Aug. 15, Macy’s spent $97 million in merger costs. The giant department-store chain’s performance has been mixed since 2005. Private-equity firm Kohlberg, Kravis & Roberts & Co. has reportedly been sizing up Macy’s for a possible buyout. Lately, the retail giant has reported some disappointing financial news.

Macy’s comparable-store numbers declined 2.6 percent during its 2007 second quarter, compared with the same time in the previous year. Net sales for the second quarter in 2007 totaled $5.89 billion, a decrease of $103 million, or 1.7 percent from the net sales of the second quarter of 2006, which were reported as $5.99 billion.

Macy’s recent numbers have lead analysts and retail watchers to draw divergent conclusions about the retail chain’s future.

Retail analyst Michael Exstein sees hope on the horizon. Exstein, an analyst with New York–based Credit Suisse, wrote in an Aug. 15 research note that while Macy’s management was distressed with sluggish apparel sales, the chain should be able to push through the soft economic market by offering aggressive markdowns.

Bob Buchanan, an analyst for St. Louis–based A.G. Edwards & Sons Inc., had a different take on the numbers. Buchanan took the second quarter’s declines as a harbinger of more hard times for the department store. He wrote in an Aug. 15 research note that if Macy’s were to end the year with negative same-store numbers, the retailer would be in danger of losing market share.

Macy’s executives declined to be interviewed for this story, but many Macy’s watchers said they believe that the department store’s management has stumbled on the way to realizing the store’s big vision.

Buying-office owner Mercedes Gonzalez said that the retailer’s problems stemmed from merchandising. The store cannot proclaim the new era envisioned by the Emmy Awards’ commercial when much of the merchandise choices seem similar to the old Macy’s, according to Gonzalez, a director of New York–based Global Purchasing Cos. “They are missing out on young designers,” she said. “They’re too promotional and price-driven.”

Buchanan judged Macy’s merchandising to be “spot on” with brands such as Tommy Hilfiger, Ralph Lauren and Paper, Denim & Cloth, as well as its own private-label brands, including Inc. International Concepts. Other executives watching the department-store sector said Macy’s is competing in an especially tough and well-merchandised field.

Macy’s often seeks to attract customers also wooed by other stores in a revitalized department-store market that includes Nordstrom, JCPenney and Kohl’s. On Oct. 2, Kohl’s released an aggressive plan to build more than 1,400 stores in the next five years.

However, the future of Macy’s might be shaped by crowds of style-savvy people buying the latest designs of fashion-industry stars, as promised by the retailer’s Emmys commercial, said Kenneth L. Wengrod, president of commercial financial institution FTC Commercial Corp.

While the commercial offered promise for Macy’s new direction, Wengrod said some changes must take place at the retailer. It might mean taking the public corporation private. “If [private equity firm] KKR comes in, it would have a positive impact on the organization,” Wengrod said. “Macy’s management will be able to employ long-term corporate strategies and merchandising. It will not be so concerned about short-term quarterly results that will affect their stock prices.”

Former Macy’s advertising copy director Bonnie Drewniany also thought change could be in the department store’s future. But the retailer must get behind one message, said Drewniany, now a professor of advertising at the University of South Carolina. “I was thrilled to see an image campaign for Macy’s because I think they have been running far too many sales-oriented ads.”

By running sales-driven ads, Macy’s has been making its brand synonymous with great sales. “It is hardly the position a better department store wants to have,” she said.